CKGSB

CHEUNG KONG
GRADUATE SCHOOL
OF BUSINESS

K N O W L E D G E
Volume No. 24
Winter 2016 $12.00

Towards a
Re-globalized World
After a long period of expansion in global trade,
some in the West are pushing back
· Brexit has changed China’s relationship with Britain and the EU
· The world’s factory is beginning to automate away the world’s largest workforce
· Now the leader in high-speed rail, China is rolling its trains out to the world
Table of Contents Winter 2016

6
China Insight

22 The World’s Automated Factory China Data

From stats on trains to bikes, and
Robots may promise a bright future for movies to shipping, the numbers you
Chinese manufacturing, but a darker one for Chinese workers need to know

10
Comment
It Doesn’t Stop Here
Although this year has seen a retreat from the trends that define

12
globalization, the world will continue to grow closer
China Insight

Private Thirst
Less money is flowing to investment
in private enterprises in China
39
China Insight
Bargaining on Brexit
What does Brexit have to say
about China and the World?

46
China Insight

Searching for the Future

Baidu, China’s search giant, needs to a find
better business model beyond ads

CKGSB Knowledge 2016

/3
Table of Contents

Issue: Winter 2016

Vol. No. 24

Editor-in-Chief
Zhou Li
Coordination 
Deng Yuanyuan, Liu Sha
52 56
Produced By
SinoMedia
Managing Editor
Tom Nunlist
Design
Jason Wong, AMAO, Lisa Ye
Wei Bingnan, Yulong Lli C-Suite Q&A
Cover by Wei Bingnan Philippe Gas, General Manager of the Shanghai Georg Tacke, CEO of Simon-Kucher &
Disney Resort, discusses challenges and Disney’s Partners, discusses common pitfalls in
ISSN 2312-9905 partnership with the Chinese government product innovation and how to avoid them
Publisher
CKGSB GLOBAL LIMITED
Suite 3203, 32/F, Champion Tower,
3 Garden Road,
Central, Hong Kong

For Letters to the Editor or reprint

59 62 65
requests, please contact:
ckgsb.knowledge@ckgsb.edu.cn

China Insight
Down on the Farm
17
After years of focus on urban
development, priorities are
shifting toward agriculture
Q&A
Bill Bishop, author of the
Sinocism newsletter, talks
current affairs, China in the
media and the view from
Washington DC
The Thinker Interview
Edward E. Lawler III,
Distinguished Professor at the
Marshall School of Business,
discusses the changing nature
of employment
Q&A
Larry Summers, former US
Treasury Secretary, talks
about China’s significant
economic challenges and
global influence

Downtime

Working it Out
67
Chinese businesspeople are
finding new ways to be fit

China Insight
High-speed Diplomacy
28 China Insight
Faith Management
33
Long an importer of technology, China is How wealth management products have
rolling out its own trains to the world helped bring shadow banking main stream

44
Business Barometer
8 Snapshot 70 Bookshelf
Ad It Up
Profitable, but Troubled Kaiser Kuo recommends books
The way China spends advertising on China and beyond
Firms make money and face issues money is changing with the times

4 / CKGSB Knowledge 2016

Letter from the Editor Winter 2016

Sustaining Globalization

I
n this issue of CKGSB Knowledge, business model, while in our Downtime

CKGSB
we are taking the unusual step of CHEUNG KONG section (page 67), we discuss the chang-
GRADUATE SCHOOL
including a Comment as the cover OF BUSINESS ing culture of young professionals in
story, on what we see is the key issue China, who are increasingly turning their
K N O W L E D G E WINTER 2016
Volume No. 24
$12.00

of our age—keeping the overall strat-
egy of globalization, which has had such
a positive impact on the world over the
past few decades, on track in the face
of significant new challenges. The elec-
tion of Donald Trump to the presidency
of the United States and the decision
by a majority of British voters to leave
the European Union are simply the two
most high-profile indications of a grow-
ing wave of discontent in many countries
at the impact that globalization has had.
All countries have benefitted overall,
but some segments of the population
of some countries have not, and these
backs on baijiu and banquets in favor of
jogging and yoga.
For our interview section, we talk
with Philippe Gas, General Manager of
the Shanghai Disney Resort, in a wide-
ranging discussion about the history of
the park, Disney’s close partnership with
Chinese government and more. Other in-
terviews include a revealing Q&A with
one of the top commentators on China’s
economy, Bill Bishop, and an interview
Towards a with Georg Tacke, one of the world’s
Re-globalized World most prominent business consultants on
After a long period of expansion in global trade,
strategy and marketing.
some in the West are pushing back
The world is changing fast, and
· Brexit has changed China’s relationship with Britain and the EU

groups, previously largely unnoticed and ·

·
we at CKGSB are eager to keep ahead
The world’s factory is beginning to automate away the world’s largest workforce
Now the leader in high-speed rail, China is rolling its trains out to the world

discounted, are now increasingly making of the curve with our articles and com-
themselves heard. And the year ahead mentaries. If you have any comments or
will see elections in a number of countries in Europe that could very opinions on any of our offerings, we would love to hear from you
well see further gains for politicians who wish to see a rollback of (lzhou@ckgsb.edu.cn or ckgsb.knowledge@ckgsb.edu.cn).
liberalized trade and investment. But the answer, we believe deeply,
is not an unwinding of the ties that now bind the world together, Yours Sincerely,
but rather a strengthening and improvement of them. The way for-
ward is not de-globalization but rather re-globalization. The Cheung
Kong Graduate School of Business (CKGSB) believes that business
leaders in this new era will need to be attuned to three elements—
Globalization, Humanity and Innovation, which we group in the
acronym GHI. Please read our Comment on page 10, as well as the
article looking at how China’s relations with the EU and Britain are
likely to be affected by Brexit on page 39.
Another topic that is likely to have almost as big an impact on Zhou Li
the world economy as globalization in the years ahead is automa- Assistant Dean, CKGSB
tion, and on page 22 we review the rise of the robots, and how Chi-
na’s role as the Factory of the World and its employment landscape For more insights on the Chinese economy and business, please
could be affected by this basic technological shift in manufacturing, visit the CKGSB Knowledge site: http://knowledge.ckgsb.edu.cn/
and many other sectors too.
In addition, we look in-depth at a number of important trends we
have identified in China’s economy, including the changing face of
agriculture (page 17), the wealth management product segment of
the Chinese finance industry (page 33) and the implications of, and
prospects for, the slowdown underway in private investment into
the real economy (page 12). Our company profile this issue (page
46) is search giant Baidu, which is in the midst of a major shift in its

CKGSB Knowledge 2016

/5
China Data

All Aboard for Africa

China announced it will build a

$4 billion railway
China Data connecting the Ethiopian
capital of Addis Ababa to the
The stats you need to know neighboring country of Djibouti
Source: The Wall Street Journal

On Loan We Can Rebuild Them

New home loans in the
first nine months of
China has launched a RMB 350 billion ($52.5 billion) state
enterprise restructuring fund to advance its ‘supply-side’ reforms
2016 reached

$539 billion ,
more than double the
same period in 2015,
as the property market
heated up

Source: Reuters
Source: Caixin

Eurotrip
China has set up a
€10 billion investment
fund to finance infrastructure
projects in Central and Eastern
Europe
Source: Reuters

Out of Juice
95% of China’s electric vehicle startups
face closure in a massive industry shakeout Stream of Money
Live streaming apps, which allow anyone
with a smart phone to broadcast live to an
audience, are expected to generate
this year as some users hit stardom
$5 billion

Source: Bloomberg Source: The Wall Street Journal

6 / CKGSB Knowledge 2016

 Winter 2016

Bicycle Bounty
Venture capital funds raised

$200 million for several

bike share startups, which have
exploded in popularity this year

Source: Caixin

Steady as She Goes

Not Shipping Out China’s GDP has grown at 6.7% for three
quarters in a row to Q3 this year
China’s September exports fell 10% from a year earlier
amid a broad economic slowdown
USD Hundreds of Millions

Source: Reuters Source: Trading Economics

Subsidized Entertainment
Dalian Wanda’s new movie studio complex in Qingdao will offer $150 million
in annual subsidies to Hollywood movie producers

Source: Financial Times

Arrivals Fast Fingers

133 million Chinese tourists will make overseas trips by Due to phone-loving millennials, China’s online sales of fast-moving
the end of 2016, up from 120 million in 2015
consumer goods (FMCG) grew at an average of
from 2010-15, while the US and UK grew at
78.4%
10.7% and 7.9% respectively
Source: Financial Times

Source: South China Morning Post

Snapshot

Source: eMarketer, China Internet Watch

8 / CKGSB Knowledge 2016

 Winter 2016

Ad It Up
China’s ad spend is evolving
China strives to be a consumer-based economy, and as such it is
not surprising that advertising spending has risen by leaps and
bounds the past few years, especially as people become more
affluent. However, the ad spend is also changing to reflect the
times. Mobile spending has risen ten-fold in the past three years,
while print spending is slowly dropping off. And the change is sure
to continue along with more digital disruption.

CKGSB Knowledge 2016

/9
Comment
It Doesn’t Stop Here
O
n April 15, 1981, some 500 Chinese
officials and Americans gathered in
the Great Hall of the People in Bei-
jing to celebrate the opening of the Coca-
Cola Company’s first mainland bottling
plant since 1949. It was still the early days
of Deng Xiaoping’s reform and opening
process, and the international community
was eager to have China participate in the
new trend of “globalization.” “[This] may
be one of the most important days… in the
history of the world,” said Roberto C. Goi-
zueta, then the chairman of Coca Cola.
Today, Coke is as popular in China as
anywhere, but the international mood has
to a great extent shifted. The deeply-held
views on free trade and open access for all,
which are at the heart of the globalization
trend of recent decades, have been joined
by ever-more insistent drum beats of dis-
sent. From Europe and North America
particularly, but from other places as well,
there are calls for a rollback, for trade re-
strictions, for sanctions and barriers. There
are those in the West who believe that to
protect jobs and industries, it is necessary
to replace “globalization” with “de-global-
ization.”
Who is Winning?
China was once a closed economy and an
opponent of globalization. Now it is one of
the strongest advocates because of the obvi-
10 / CKGSB Knowledge 2016
ous benefits that it offers. Globalization has
unquestionably helped hundreds of mil-
lions of people to be lifted out of poverty.
Hunger, the bane of China for millennia,
has been effectively wiped out. In today’s
China, people are hungry for streaming
media on their smartphones and high-speed
train trips to exotic locations. Desperation
has long given way to aspiration.
But this process of globalization was
not simply China’s gain at a loss to others.
It has truly been a win-win for just about
all. National incomes are up consistently
in recent decades and while average wages
in many countries have not risen signifi-
cantly, the money in peopleʼs wallets goes
much further than it ever used to. The basic
goods of modern life are drastically more
affordable because in the past three decades
China has exported huge savings in living
expenses through cheaper products.
Of course, by becoming the “factory
of the world,” China’s rise did indeed re-
allocate some jobs in the West. Or rather,
forced Western countries to face inefficien-
cies and find other routes to development,
which to a surprising extent they have
made progress in doing. The economies of
Europe and the US are dramatically differ-
ent from 30 years ago—more flexible, with
higher productivity and generally higher
living standards across the board.
And here, too, is an interesting his-
torical mirror image. In the days before it
joined the WTO, China also had a strong
contingent of anti-globalization voices. The
loudest among them were the state-owned
enterprises, and their professed fears were
strikingly familiar—that Chinese compa-
nies would be wiped out in the face of open
competition with foreign companies, and
that once-secure jobs would evaporate. But
the leaders at the time, particularly Premier
Zhu Rongji, blazed a trail ahead, and in the
end both China and the world benefitted.
Re-globalization
Now as then, protecting inefficiency is not
the answer to the problem. What is needed
is not “de-globalization” but “re-globaliza-
tion,” a fresh approach to the process of
integrating the disparate economies of the
world in a way that is equitable to as many
people as possible. And re-globalization
needs to also take into account the reason-
able requirements of global companies for
fair access to the ever-expanding China
market.
The signs of opposition to globaliza-
tion are currently much in evidence, but
globalization should not and will not end
here. The increasingly global approach of
the Internet and transnational corporations,
for instance, will continue to grow regard-
less of election results or other changes
anywhere.

The next period of “re-globalization,”
however, will be differentiated from the
globalization process of the past few de-
cades in several ways. Firstly, science and
technology will develop more rapidly, with
artificial intelligence, and profound advanc-
es in medicine and the life sciences, gen-
erating all sorts of global opportunities and
new problems.
This next phase will also see a shift in
the rankings of the players. The last round
of globalization was dominated by the
United States, whereas in the years ahead,
neither the US nor China will dominate—it
will rather be a multi-polar scenario, with
India and other dynamic economies, as well
as globally competitive sectors in advanced
economies also playing much more bal-
anced roles.
A third feature is likely to be a shift
from dominance of multinational compa-
nies through to a much bigger role for small
and medium-sized enterprises and even in-
terest groups on the Internet such as Wiki-
pedia.
China’s position vis-a-vis other nations
has shifted dramatically since the start of
this globalization story in the early 1980s.
In those days, its role in the world economy
was minuscule and so in consequence was
its voice. But today China is a major player
by any measure, and will inevitably and
rightfully have a major voice in the way in
which economic relationships change in the
years ahead.
It is of course in the interest of China to
have continued globalization, and the trem-
ors that are shaking Western societies need
to be recognized and addressed. But the an-
swer is certainly not the erection of walls.
One factor to consider is the paradigm-
bending changes to production that are
likely soon to hit us. In the not-too-distant
future, manufacturing jobs will not be
threatened by cheaper workers in foreign
lands, but by a far more disciplined army of
tireless machines—the robots are coming,
even to China. Job losses to other humans
will pale in comparison to job losses to ro-
bots.
For all the complaining in certain
quarters, the West today is better equipped
to deal with the revolution that robots
China now has a
seat at the table
of globalization.
And just like
the opening-
up all those
decades ago, it
is unquestionably
a good thing
may unleash. The reason is, simply, that
manufacturing jobs have been disappear-
ing from the West for decades, and the
workforce has already gone a long way in
adapting to that by switching to the service
and knowledge economy. Making that
same transition is a goal of the Chinese
government, but China will not have the
luxury of time on its side. And although
the crystal ball never produces a clear im-
age, it is a safe bet that the world cannot
afford to let China deal with the transition
pains all on its own. A new approach to
globalization will be necessary.
The next phase of globalization will
likely be about much more than labor and
trade deals, it will be about a deeper inter-
twining of technology, society and culture
on a global scale. This new era is already
on the world’s doorstep. A factory worker,
even one in a highly globalized system of
trade, is ultimately walled off, a faceless
Winter 2016
producer of shoes, or steel, or even those
magically powerful instruments of commu-
nication, smart phones. But a knowledge
worker, or a cultural worker, is not.
The workforce in the technology and
information industries that is driving the fu-
ture of humanity is remarkably more fluid.
As of this year, 37% of workers in Silicon
Valley are foreign-born. Many of them are
Chinese, and many return to China to bring
their knowledge and experience with them
to break new ground at home.
Given the technological nature of these
changes, they will affect everyone simulta-
neously, and will be as unhampered by na-
tional borders as is the weather. That does
not, however, mean that the work of busi-
ness and political relationships is somehow
lessened—on the contrary, the importance
is magnified.
This means, among other things, that a
newly-powerful China will command not
only a greater say in international matters,
but also bear a greater responsibility. Chi-
na’s re-globalization interests need to bet-
ter take into consideration the community
interests of its business partners, be it in the
Midwestern United States, in France with
its wineries, or in countries across Africa.
In short, these relationships demand a cer-
tain reciprocity that China, now more than
ever, has the duty to deliver.
On Deck
What is for sure is that, whatever happens,
China and other players will have a seat
at the table of globalization. And just like
the opening-up all those decades ago, that
is unquestionably a good thing. Resolving
the issues at the heart of globalization is
the responsibility of all and they can only
be solved by a world working together, as
one, not through the implementation of a
mélange of national solutions.
The uncertainty of it all is scary, to be
sure, and all players feel the pressure of the
future. But a connected world is the only
future that can be sustained, and this is a
time to re-evaluate and re-invigorate glo-
balization, not turn away from it. So take a
deep breath and share a Coke with some-
one. Or perhaps instead a cup of the world’s
original globalized beverage: tea.
CKGSB Knowledge 2016
/ 11
China Insight

Private Thirst
Less money is flowing to private enterprise in China
By Wynne Wang

Image by Lisa Ye

12 / CKGSB Knowledge 2016


Z
hang Qingli has little interest in in-
vesting further in his textile business,
as rising labor costs and raw material
prices, as well as falling sales prices con-
tinue to shrink his profit margin.
“I don’t dare to invest more, not until
a trustworthy client can promise me stable
flows of orders,” says Zhang, whose fac-
tory in China’s eastern Jiangsu Province
mainly exports products overseas.
Zhang is not alone in his limited con-
fidence in the future. Private investment in
China in terms of capital goods like fac-
tories and trucks grew by just 2.1% in the
yearʼs first eight months after nearly 30%
average annual growth over the past de-
cade. In June, it fell to a record low since
China started tracking the data, and dipped
even lower in July and August.
The pullback is happening just as the
domestic economy is shifting to lower gear.
The economy expanded 6.9% in 2015, the
slowest pace in a quarter of a century, and is
expected to cool to 6.6% this year, and slow
further still to 6.5% in 2017, as the govern-
ment continues policy support to help ward
off a sharper slowdown.
While China’s state-owned enterprises
dominate the monopoly industries such as
petroleum and telecoms, the country’s pri-
vate economy is still the major source for
growth in production, employment and ex-
ports—indeed, it was the private sector that
created the Chinese economic ‘miracle’ of
the reform era.
“We have to realize that private invest-
ment is rather large and works as a strong
driver for consumption and job creation,”
said Premier Li Keqiang at a conference
in July with local government officials. He
added that private investment is not only a
concern for now, as it will affect economic
development for years to come.
But whether the Chinese government
has the ability to stimulate private business
is unclear.
Who Hit the Brakes?
China’s overall investment growth—in-
cluding state investment—has slowed down
only slightly, from 10.1% at the end of last
year to 8.2% in September. But private sec-
tor investment in the same period slid from
I don’t dare to
invest more,
not until a
trustworthy client
can promise me
stable flows of
orders
Zhang Qingli
Factory Owner
Jiangsu province
10% to 2.1% in August, before inching
back up to 2.5% in September.
“There is simply no profit to hunt for,”
said Liu Dongliang, senior analyst with
China Merchants Bank. “The return on
investment has dropped, so why bother to
invest further.”
Private companies are more sensitive to
economic changes, and will jump out of a
sector if profit margins shrink. State-owned
firms, however, have more complicated
goals, including supporting government
policies, and are more likely to soldier on.
With investment opportunities sparse,
Chinese firms reported an 18% jump in
cash holdings during the latest quarter, the
biggest increase in six years. The $1.2 tril-
lion stockpile—which excludes banks and
brokerages—grew at a faster pace than in
the US, Europe and Japan, according to
data compiled by Bloomberg.
Not all sectors are suffering from the
Winter 2016
investment slowdown. In the first eight
months, infrastructure investment—almost
entirely state-funded—increased by 19.7%,
“playing a key supporting role in stabiliz-
ing investment growth in the country,” says
Wang Baobin, a senior statistician from
National Bureau of Statistics.
But China’s strategy to prop up eco-
nomic growth by pushing large-scale
projects could also potentially sideline the
private companies that account for three-
fifths of China’s economy and four-fifths of
its labor force. The government’s push for
infrastructure projects usually come with
financial and policy support, funds that are
therefore not available to bolster private
companies.
A survey of China’s industrial economy
by the Cheung Kong Graduate School of
Business pointed to the same trend. Only
9% of firms polled made fixed investment
in the second quarter and a mere 2% made
expansionary investment. The sluggish
pace of investment looks like it will not im-
prove in the third quarter as only six firms
of about 2,000 said they planned to make
investments.
“Recent media reports have noted that
the country’s fixed investment during the
first six months of this year was dominated
by government-led investment, while pri-
vate investment has been contracting. Our
survey has found this trend to be a persis-
tent one,” said the survey report.
There are, however, voices saying that
the China’s private investment spending
isn’t completely falling off a cliff. Analysis
by Nicholas Lardy and Zixuan Huang of the
Peterson Institute suggests the official data
has exaggerated the decline as the govern-
ment’s RMB1 trillion bail out of the stock
market has pushed some private companies
into the state-controlled category, because
state investment funds now own significant
parts of those companies.
The researchers tried to provide more
clarity by detailed examination of the share
of investment undertaken by private and
privately-controlled companies. It shows
the private share declined slightly in the
first half of this year, but it is still the first
decline recorded in the decade for which
these data are available.
CKGSB Knowledge 2016
/ 13
China Insight
Real Economy, Real Problems
But private companies aren’t only being
squeezed by policy, they are also being
challenged by the market.
Like Zhang Qingli’s concerns over
overseas orders, the Cheung Kong Gradu-
ate School of Business school survey also
indicated that weak demand is by far the
biggest challenge for the industrial econo-
my, as reported by 81% of the firms sur-
veyed in the second quarter. Some enter-
prises also cited concerns over labor and
raw material costs.
“We heard about a lot of policy support
for small companies, but they [only appear]
in the news stories and not in real life,” said
Zhang, complaining about lack of govern-
ment and bank credit support.
Zhang said it is very difficult for small
companies like his to get bank loans unless
he provides hard collateral, usually in the
form of real estate assets. Instead, he relies
on retained profit and other sources to keep
the business going.
John Wang, China manager of Corpo-
rate Value Associates, who has been con-
sulting for Chinese banks for more than 10
years, says the banks do tend to favor state-
Public Spending, Private Fears
Investment by state-owned companies has spiked as private investment has fallen
Change from previous year
Monthly private fixed asset investment
Source: The Wall Street Journal
14 / CKGSB Knowledge 2016
owned companies.
“When the economy slows, it has a sim-
ilar impact on state and private companies,”
says Wang. “But to the banks, the private
companies pose additional credit risks.”
Wang says that private companies may
dress up their balance sheets, misappropri-
ate the borrowed money or even transfer it
to another company and bankrupt the cur-
rent one.
“The bar for private companies is high-
er versus the state-owned companies even
if they have similar operating results, cash
flows, and collaterals, ” Wang says.
Possible Solutions
China’s top economic planning body, the
National Development and Reform Com-
mission, sent out a research team in May
to look into the private investment slow-
down problem, and then issued a work plan
including 60 proposals. It mainly suggests
that local governments improve services,
help private companies to find funding and
offer greater access to more areas.
But such structural reform pronounce-
ments have yet to result in much real
improvement. The government’s usual
Monthly state fixed asset investment
method of infrastructure investment to spur
growth has not shown much effect in shor-
ing up the broad economy this time, and
has so far failed to encourage more private
companies to invest.
China’s central bank has been pumping
money into the banking system, but ana-
lysts are concerned that much of the cash
hasn’t been able to reach the real economy,
or that companies that have spare money
would rather hoard instead of expand their
business.
Speaking at a forum in Shanghai Au-
gust, Sheng Songcheng, the head of the
central bankʼs statistics department, said
the gap between the growth rates of the nar-
rower gauge of money supply, M1, and the
broader measure of money supply, M2, had
widened since October of last year largely
because companies were having a hard time
finding good investment opportunities.
China’s M2 slowed down to 10.2% in
July year on year, the weakest pace in 15
months. The slowdown in M2 suggests that
money isnʼt being put to productive use.
Rather, it is just sitting idle in corporate
bank accounts.
What also worries analysts is that the

high-flying property market has probably
attracted too much liquidity from the real
economy. Home prices are up about 60%
in the past year in cities like Shanghai and
Shenzhen.
“I plan to buy another apartment in my
hometown where prices are expected to
rise in the coming years,” said Zoe Chen,
who owns an export company in Zhejiang
Province.
Zoe’s company exports ink, and she
says she has no plans to expand production.
“There aren’t many investment oppor-
tunities,” she adds. “If you invest into the
products sold by the banks, they only offer
you a return around 4%.”
In the first half of 2016, close to half
of new bank loans were housing mortgage
loans, according to the state media. While
loans to non-financial enterprises have
slowed, loans for fixed assets increased by
7.5% on year, 1.6 percentage points down
on the first quarter.
Bright Spots
But not everything is doom and gloom.
“We are investing every year to up-
date our manufacturing facilities to make
our production more efficient and develop
new products,” says Song Zhigen, whose
company is a major stamp pad producer in
China.
Song represents a group of business
owners that believe they can continue to
make decent profit by increasing efficiency
and introducing new products, even if the
industry they focus on has slowed down.
“The companies that produce automat-
ed equipment are very tied up recently, as
so many manufacturers are replacing their
facilities,” Song says, adding his company
would invest at least half a million RMB for
the same purpose.
Additionally, some industries in China
are still expanding. Official data showed
that private investments in electricity, heat-
ing power production and supply grew by
32.6% in the first eight months this year,
while private investment in education in-
creased by 15.7%, and 13.5% in auto man-
ufacturing in the same period.
The speed of private investment also
differs from place to place. Eastern China
M1/M2 Gap Suggests Cash Hoarding
The gap between M1 and M2 is at its widest in years
Source: Gavekal Capital
grew fastest, recording growth of 7.1% in
the first eight months this year. It’s not a
surprise as the area includes economically
thriving cities and provinces like Shanghai,
Jiangsu and Zhejiang.
But northeastern China has been a drag
on the national economy, as the area’s pri-
vate investment declined by 30.3% from
January to August. Liaoning province even
posted a 1.0% drop in GDP in the first half
of 2016.
“Liaoning is a famous old industrial
base in our country with most of its enter-
prises in commodity chemicals,” said Sheng
Laiyun, spokesman with the National Bu-
reau of Statistics. “In this round of readjust-
ment, commodity chemical prices had the
deepest correction, which posed downward
pressure on Liaoning’s economy.”
Down but Not Out
China’s private investment isn’t slowing
down all on its own, but rather along with
the country’s economy as a whole. And
while China is looking for reasons and so-
lutions in the private sector, the real ques-
tion is how to spark growth in general.
One solution under discussion would be
for China to further reform its state-owned
enterprises and allow the private compa-
nies to compete in more areas. There are
Winter 2016
also options like cutting taxes, launching
favorable policies and sharing infrastruc-
ture construction opportunities with private
companies more effectively.
Whether China can enact the right re-
forms to regenerate growth is an open ques-
tion. The government is surly aware of the
problem, but to carry out reforms to over-
haul the system would mean cutting into
the meat from the free lunches currently en-
joyed by state-owned companies and local
governments.
But ultimately, shoring up the confi-
dence of entrepreneurs means the prospect
of profit, either by raising expected revenue
or cutting costs. The recent dip in the value
of the RMB is helping export companies
stay the course, but that’s not solid enough
to encourage them to invest. They may see
hopes rise if China can tame soaring proper-
ty prices, control the rise in labor costs and
make the government work more efficient-
ly, which would all mean lower costs for
private companies. But that is a tall order.
In the end, it might just be up to the
market.
“Private companies invest for genuine
demand,” says Liu Dongliang, “They re-
treat quickly when the broad environment
worsens, and they will come back when the
ice melts.”
CKGSB Knowledge 2016
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China Insight Winter 2016

Down on the Farm

After years of focus on urban development,
priorities are shifting towards agriculture
By Tom Nunlist

Image by AMAO

CKGSB Knowledge 2016

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China Insight

F
or a visiter, there are quite a few things
to envy about He Kunhou’s farm life
out in the vast countryside around
Chongqing city in central China. His tra-
ditional tile-roofed home has a large, sun-
soaked courtyard with a gaggle of chickens
milling about and beehives built right into
the open-air walls. Just across the lane lay
the rice fields, crisscrossed with elevated
paths—a little less than an acre he calls his
own.
In recent years, Farmer He’s honey pro-
duction has provided the bulk of his income,
Family Plot
The rustic feel of Chinese farms, especially
in contrast to their high-tech Western coun-
terparts, belies the truly massive agricul-
tural progress China has experienced in the
[The government] past century or so.
Basic figures trace an inspiring profile.
At the ascendance of the Communist Party
doesn’t see in 1949, and before the land collectiviza-
tion of the early 1950s, China’s total grain
production was roughly 100 million tons.
[industry and Despite the tragedy of the Great Leap For-
ward famine from 1958-1961, by the start

about RMB 30,000 annually ($4,400). His
grain output has dropped off, particularly
because he is now 70 years old.
“I don’t have much energy, so I only
plant one mu,” he says, a mu being roughly
one-sixth of an acre. And with his sons long
since having moved to the city, the future of
his little plot is uncertain.
The situation of Farmer He’s farm is
typical of a seeming rupture in Chinese
development—while manufacturing and
urban life took off, catapulting China to
world-power status, rural China and farm-
ing lagged behind.
agriculture]
of the reform period in 1978, that figure had
tripled to 300 million tons.
But although production had grown,
as separate collectivized farming was still vastly ineffi-
cient, and yields were often barely sufficient
to feed the country. The supreme leader of
anymore – they the time, Deng Xiaoping abandoned the in-
efficient people’s communes and allowed
farmers to tend their own individual fields
want to integrate again. The so-called Household Responsi-
bility System became a national policy in
1981.
them into one Also around that time, new crops and
techniques were introduced into China,

“Agriculture has very much been
sacrificed to advance the urban areas,
factories and industry,” says Erlend Ek,
agriculture and marine manager at China
Policy, a Beijing-based research and advi-
sory company.
The fundamentals are striking: In 2013,
86% of farms in China were only 1.6 acres,
a tiny fraction of the size of the average
441-acre US industrialized farm. Most of
the work on these miniscule plots of land
is done by hand, and by an increasingly el-
derly population of farmers who now aver-
age over 50 years old. It is unclear who will
replace them, and the development of large,
mechanized farms is hindered by a number
of factors, including the hazy status of rural
land rights.
But the wheels of reform are turning.
The government is making changes to ru-
ral land regulations and pushing private in-
dustry into the once off-limits agricultural
sector to develop corporate farms. It has
announced plans to invest $450 billion by
2020 to secure the future of this most fun-
damental of economic sectors. But as with
system… That’s
a fundamental
change
Erland Ek
Agriculture and Marine Manager
China Policy
any crop, the harvest is uncertain.
“It is a transformative moment for
the Chinese agricultural sector,” says Ja-
son Young, lecturer and research fellow
at the New Zealand Contemporary China
Research Centre.“You have the central
government promoting the idea that what
China needs is to supplement its modern
urban sector and urban industry… [with a]
better regulated and more diverse agricul-
tural sector.”
thanks in part to the efforts of famed agri-
culturalist Norman Bourlag, the father of
the so-called “green revolution” that helped
to banish widespread poverty. In this sense,
reform in China’s agricultural sector is not
new.
“Certain things have been happening
for a long time, new technologies, new
types of grains, fertilizer, pesticides, that
type of thing,” says Young.
With commune farming a thing of the
past and new opportunities for factory work
appearing in the 1980s, a major transforma-
tion took place. Roughly 700 million Chi-
nese people have since left farming to live
in the cities, but agricultural production
has ballooned anyway. In 1998, China pro-
duced 500 million tons of grain, while last
year it turned out 621 million tons.
But this progress is under threat, just as
He’s farm shows.
“Now farmers are already in their 50s,”
says Zheng Fengtian, professor of agricul-
tural economics at Renmin University. “In
ten years they will be in their 60s and they
will be unable to work.”

18 / CKGSB Knowledge 2016


A Hundred Million Homesteads
Chinese farms are small, and farmers numerous
US
Avg. US farm is 441 acres
<2% of the population - 3.2mn
Source: ScienceDirect; US Bureau of Labor Statistics; USDA; New York Times
Who exactly will do the farming, and
how it will be done, are major question
marks.
Hungry for Change
Naturally, the first concern of Beijing is mak-
ing sure that there is enough food to satisfy
the stomachs of China’s 1.3 billion people.
“Food security is national security,”
says Zheng.
Historically that meant the government
doggedly pursued a policy of self-sufficien-
cy in grain production, the thinking being
that relying on anyone but China’s own
people was a huge risk, particularly in the
event of war. This attitude has been fad-
ing, not so much because the leadership no
longer sees conflict as a possibility, but be-
cause of global economic realities.
“[Now] they want 100% ability for self-
sufficiency,” says Ek. “They have under-
stood that you can’t produce where the mar-
ket won’t pay for it. The price is too high.”
The price referred to is the cost of sup-
porting grain production. For farmers,
staple crops such as rice and potatoes are
very low-margin, and so many of them
Winter 2016
China
Avg. Chinese farm is 1.6 acres
31% of the population - 240mn
have switched to other products, includ-
ing high-value vegetables or meat—Young
notes that there is massive demand for bet-
ter quality and more diverse food products
from urbanites.
Collective land In practice, there is not much the state
can do these days to battle the market and
ownership is not
encourage more grain planting except im-
plementing price floors via mass state pur-
chasing. But that is no longer a sustainable
an obstacle to practice.
“State intervention is putting a huge fis-
cal burden on the central coffer,” says For-
the land transfer rest Qian Zhang, professor of sociology at
Singapore Management University, who
researches land rights and agriculture in
that is already China. “In the past three years, the state has
lowered its protection price to the extent
that it is just market price.”
happening Food production has long been a global
enterprise, and Beijing is now moving in
that direction, which alone is a major policy
Forrest Qian Zhang change.
“[The Minister of Agriculture] traveled
Professor of Sociology to 25 countries last year,” says Ek. “Before
Singapore Management University that he never traveled.”
But although orienting China’s agricul-
CKGSB Knowledge 2016
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China Insight
Machines are now more common, but most farming is still done by hand
tural sector toward the world market is a ne-
cessity, that will not be enough to offset the
coming impact of tens of millions of small-
time farmers riding off into the sunset. In
their wake they could leave vast tracts of
unplanted land, albeit broken up into tiny
plots that are unprofitable and unattractive
at such small scale.
What must happen is a consolidation of
these plots into large farms that can be in-
dustrialized. This is underway in some areas
such as animal husbandry where the require-
ment for land is lower and profits higher. But
encouraging this process for staple grains
such as rice and wheat, which are low-profit,
is the government’s major goal in agriculture
reform. Previously the state wanted to push
industry to help meet the needs to agricul-
ture, but now deeper integration is the goal.
“They don’t see [industry and agricul-
ture] as separate anymore—they want to
integrate them into one system,” says Ek.
“That’s a fundamental change.”
One way the state is working toward this
goal is by laying the groundwork through
massive state investment. According to Ek,
of the hundreds of billions being spent on ag-
ricultural modernization efforts, about 70%
20 / CKGSB Knowledge 2016
is not going directly to the land, but rather to
materials like cement, which are necessary
to build modern irrigation systems.
But the state does not want to run farms,
and the bigger change in prospect is the
opening up of agriculture to private-sector
investment—in other words, unleashing the
forces of capitalism.
The Rights Way
This scheme, however, rests partially on
the odd circumstances of rural land rights
in China. Although the responsibilities of
farming were devolved to individual house-
holds in the 1980s, farmers still do not own
the land. The state does, through the local
rural “collectives.” Farmers have only us-
age rights for a fixed period. How this im-
pacts on the development of consolidated
corporate farms is not clear.
The government announced new rules
in November, termed “land management
rights” under which the state-run collectives
will be able to aggregate usage rights from
farmers, and then transfer the land to a cor-
poration in exchange for annual payments.
This is all new, and there is fair amount
of uncertainty, partly because of the sheer
size of China. For the top leaders, it must be
difficult to understand the situation at ground
level, especially given the data deficiencies.
“On paper it looks very good,” says Ek.
“[But] nobody knows what is really hap-
pening on the farmland. No one has abso-
lute overview.”
In fact, transfers of land usage rights
are already happening informally. As Chi-
nese rural residents have moved to the
cities to work in factories in what is the
largest migration in human history, people
often left behind their plots of land. Some-
times they let them go fallow, other times
they rented them out to neighbors, or gave
them to relatives.
“[Land rights are] already highly mar-
ketized … and the price is transparent,”
Zhang says, referring to one entrepreneur-
ial farmer in Sichuan who has already man-
aged to create a 1,600-acre rice farm—hu-
mongous by Chinese standards. Although
this kind of organic land consolidation in
still rare and on a small scale, it is neverthe-
less not dependent on state intervention.
“It doesn’t really involve any policy
change,” adds Zhang. “Collective land
ownership is not an obstacle to the land
transfer that is already happening.”
Betting the Farm
Moreover, official interference in this pro-
cess could turn out to be counter-productive
because farming is as difficult as it is an-
cient. Encouraging outside private invest-
ment from cities and industry in the way
Ek describes risks handing farming to over-
confident city slickers.
“[Companies] get into agriculture, and
put in a lot of investment to improve the
land, they set up the infrastructure, improve
the technology… and then they very quick-
ly realize that the agriculture market is very
volatile,” says Zhang. “We’ve seen cases
where companies invest millions of yuan,
set up a very modern corporate farm… and
before they can harvest the first crop they
are already running into [financial] prob-
lems.”
If those companies go bust, the resulting
situation could be worse than it was origi-
nally because that type of heavy investment
changes the physical landscape. Farmers

who transferred land rights may no longer
even recognize which plots are theirs.
Ek also sees risk in making a large-scale
switch to corporate farming, especially if it
happens fast.
“It takes months before crops are
ready,” he says, noting the seriousness of
crop failures. “If they get it wrong, they get
it very wrong.”
Another big risk has again to do with
land rights. The long-term usage right of
the land plots is very often the only real
safety net that ordinary farming families in
China have.
“[Land] is their ultimate form of social
security,” says Young. “Until you have
a full social security system… then rural
people [may] still want to have their land.”
The thinking here is that should a mi-
grant worker face true hardship and un-
employment, he can always return to the
homestead and provide a living for him-
self. But as the transformation picks up and
farms become consolidated, it will become
harder to do that—you cannot return to a
plot that has been absorbed into a giant
farming operation. It is worth noting that
this has not happened yet at large scale, de-
spite the recent economic downturn and the
closure of many factories in big hubs such
as Guangdong Province.
“I don’t have a good answer to what hap-
pened to the people laid off from Pearl River
Delta jobs,” says Zhang, but he assumes they
are still out there looking for work, noting
the lack of agricultural skills of young people
from the countryside. “All their aspiration
throughout their lives is to settle in cities. So
even if they face layoffs, joblessness, very
few of them would really seriously consider
going back to the countryside.”
Country Pace
But as big as all the issues are, the reality of
the future of farming in China is likely one
of continued gradual changes. The base of
Chinese agricultural production is likely to
remain small farming for some time, for the
simple reason that there just are so many of
them—China is still only 55% urban. Con-
solidation doesn’t happen overnight, and
forcing that through would be inherently
unpredictable.
More Bountiful Harvests
Despite problems, China’s grain production has exploded
500mn tons
of grain
300mn tons
of grain
100mn tons
of grain
1949 1978 1998
Source: Journal of Experimental Botany; Reuters
“Big bang reform can be very, very
dangerous,” says Young, noting that China
has learned this lesson in the past. “You
won’t see radical change, but you will see
more large agribusinesses.”
The renewed focus on agriculture can
be seen as part of a broader slowdown in
China, in the economy, in urban growth and
so on. Apart from the need to get ahead of
potential problems in food production, there
is a lot of potential for economic growth in
the countryside that doesn’t involve simply
absorbing excess labor.
“I hope we will also see a reinvigora-
tion of the rural economy,” says Young,
pointing out that in addition to farming
there are huge opportunities for tourism and
small-town business. “Rural China is still a
nice place to live, but it has not developed
the same [as the city].”
This is an understatement. The urban/
rural divide is one of the most striking
features of contemporary China. On one
side there are big cities, including the ul-
Winter 2016
621mn tons
of grain
2015
tra-modern megalopolises of Beijing and
Shanghai, and the other end rural ham-
lets without much beyond the basics. The
middle ground of well-developed towns is
rather small, and nationwide there is a lot of
opportunity there beyond just agricultural
modernization.
It may take a city eye to see it, though.
Farmer He’s courtyard is currently in need
of small repairs. He sons offered to help
him make fixes, but he demurred.
“It is a waste of money,” he says. “My
children will not come back to live here.”
On that point he may well be wrong,
though. Recently his area has become a
popular spot to build modest weekend get-
aways, many of them tucked into the natu-
ral overhangs that appear in Chongqing. In
fact, He’s urban-dwelling extended family
recently built one, and have been kicking
around the idea of turning it into a rental
property, Airbnb-style. Perhaps it is a sig-
nal that now may be just the time to get
some fresh air.
CKGSB Knowledge 2016
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China Insight

The Worldʼs
Automated Factory
Robots may promise a bright future for manufacturing,
but a darker future for workers
By Matthew Fulco

Image by Wei Bingnan

22 / CKGSB Knowledge 2016

 Winter 2016

CKGSB Knowledge 2016

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China Insight
O
ver the past 25 years, China has be-
come the world’s preeminent manu-
facturer, churning out everything
from running shoes to Apple products.
Powering that ascent was heavy foreign di-
rect investment and a seemingly inexhaust-
ible pool of cheap labor.
But now as the Chinese economy slows,
wages rise and the workforce atrophies, the
decades-long manufacturing boom may be
ending. In 2015, Chinese exports fell for
just the second time since the launch of eco-
nomic reforms in 1978. Wages for China’s
277 million migrant workers rose 7.4% to
RMB3,072 per month ($473), while the
number of working-age people fell by a re-
cord 4.9 million, according to the National
Bureau of Statistics (NBS).
Deteriorating conditions have prompt-
ed some foreign businesses to reduce
their China exposure. The annual China
business-climate survey published in early
2016 by the American Chamber of Com-
merce in Beijing found that 25% of re-
spondents have either moved or are plan-
ning to shift capacity outside of China.
Half are those going to developing Asian
countries, and another 40% to the US,
Canada or Mexico.
To help deliver China from industrial
decline, the Chinese leadership is betting
on automation. Large-scale deployment
of industrial robots could raise efficiency
and lower costs, channeling the resources
of China’s vast supply chain. While some
workers would be replaced, new ones—
albeit fewer—would be needed to design,
construct and operate the manufacturing
machines.
“Robots will be a game changer for the
Chinese economy,” says Chiang Chia-wei
senior analyst at the Taipei-based Market
Intelligence & Consulting Institute (MIC),
an IT industry analysis provider in a writ-
ten reply. “Smart manufacturing is an
essential part of China’s industrial trans-
formation and bid to increase its global
competitiveness.”
At a 2014 speech at the Chinese Acad-
emy of Social Sciences (CASS), Chinese
President Xi Jinping noted a “robot revo-
lution” is underway globally. The world-
wide market for industrial robots surged
24 / CKGSB Knowledge 2016
been the world’s No. 1 buyer. The IFR
reckons that China will overtake Japan to
be the world’s top operator of industrial
robots by the end of 2016.
Robot penetration, however, remains
Robots will be a relatively low in China. In 2015, that fig-
ure was just 36 per 1,000 manufacturing
workers, 28th in the world, according to
game changer the IFR, although that does mean there is a
lot of room for growth.
But although China will likely be the
for the Chinese leading market for robots for a long time,
it faces technological challenges. Japan,
economy…
the United States, and Germany remain
the pioneers of the industrial robot indus-
try, according to MIC.
Smart But Beijing intends to directly chal-
lenge the world’s current global robotics
leaders. “We not only need to upgrade our
manufacturing robots, we also should capture markets in
many places,” President Xi told the CASS
audience.
is an essential Automation Drive
China’s ambitious robot plans in some
part of China’s ways echo Chairman Mao Zedong’s call in
1958 for China to overtake Britain in indus-
industrial
trial production within 15 years. This time,
the objective is to channel the productivity
acumen of millions of robots to surpass Ja-
transformation pan, the US and Germany in terms of man-
ufacturing prowess by the centennial anni-
versary of the People’s Republic of China
and bid to in 2049.
“Amid the continued growth of indus-
trial robots, the MIIT (Ministry of Industry
increase its global and Information Technology) has taken an
aggressive stance towards robot develop-
ment, making it one of the key strategic
competitiveness industries in China,” says Chiang.
In March, Chinese authorities approved
the China’s 13th Five-Year Plan, a policy
Chiang Chia-wei blueprint, which highlights the importance
of industrial automation and makes avail-
Senior Analyst able billions of RMB to upgrade manu-
Market Intelligence & facturing technology. The drive includes
Consulting Institute “Made in China 2025,” a state-led initiative
to make China an advanced manufacturing
power within a decade, of which automa-
from 60,000 units in 2009 to 248,000 units tion is a big part.
in 2015, according to the International “If they can automate enough of their
Federation of Robotics (IFR), an industry- lines, China’s production and revenues
lobbying group, and since 2013, China has could expand another 25% by 2025,” says

Gerald Van Hoy, a senior research analyst
at IT research firm Gartner in Oregon.
Progress toward automation is already
moving at a good clip in both the public
and private spheres. In 2015, Guangdong
province, long China’s top manufacturing
hub, pledged to spend $150 billion to install
industrial robots in its factories and estab-
lish new advanced automation centers. And
this July, Chinaʼs top 10 robot manufactur-
ers formed an alliance dedicated to research
and development of advanced industrial
and service robots.
All the efforts seem to be bearing fruit –
the output value of China’s domestic robots
reached RMB1.64 billion in 2015, up 55%
over a year earlier, according to the Qian-
zhan Industry Research Institute.
Yet for now, it remains difficult for
China to develop indigenous high-end ro-
bots.
“The domestic robot industry has a
short history—it really only began in 2000,”
says Jing Bing Zhang, the Singapore-based
research director of IDC Worldwide Robot-
ics, at the market research firm International
Data Corporation. “The base is still very
shallow.”
With automation still early, the ratio of robots to workers in China is still very low
Source: 2015 World Robot Statistics, International Federation of Robotics
Not surprisingly, then, MIC’s Chiang
says that about 70% of robots used in China
are produced by global brands.
“While the market is lucrative, Chi-
nese companies lack the ability to develop
homegrown components and have to large-
ly rely on imports,” he says. “This is why
the government has taken such an aggres-
sive stance to foster its homegrown robotics
industry over the years.”
As a result, the acquisition of foreign
technology through M&A deals has be-
come integral to China’s robotics strategy.
Overseas Shopping Spree
To hasten their climb up the value chain,
Chinese firms are buying up premium ro-
botics assets overseas. In January, China
National Chemical Corp, Guoxin Inter-
national Investment Corp, and Chinese-
European private-equity firm Agic Capital
purchased German industrial robot maker
KraussMaffei for $1 billion. In April, Zheji-
ang Wanfeng Technology Development Co
purchased the US’s Paslin Co, an automo-
tive assembly-line robotics manufacturer,
for $328 million. And in June, Agic Capi-
tal announced its acquisition of Gimatic,
Man and Machine
Winter 2016
an Italian supplier of end-of-arm tools for
industrial automation and robotics applica-
tions, for 100 million euros ($108 million).
“The motivations behind those three
major acquisitions made by Chinese buy-
ers are deeply rooted in their wishes to ob-
tain technological strength and gain system
integration experience from those foreign
companies to help them develop industrial
robot components at a faster pace,” says
Lin Yi-ching, an industry analyst at MIC.
“For those foreign companies, they have
been given a great opportunity to set foot
in China.”
Shenzhen-listed Siasun Robot & Au-
tomation Co., China’s biggest robot maker
by market value, whose customers include
General Motors, Ford and Schneider Elec-
tric, also has plans to acquire global robotic
component manufacturers. At a robotics fair
in Munich in June, Siasun president Qu Da-
okui said the company is hunting for acqui-
sition targets in Europe. According to Chi-
nese media reports, the company plans to
raise 2.96 billion yuan ($449 million) from
five institutional investors in November.
The most notable acquisition of the
year is appliance maker Midea’s $5.1 bil-
CKGSB Knowledge 2016
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China Insight
lion bid for Germany’s Kuka, one of the
world’s top-four industrial robot brands
and an employer of 12,000 people globally.
Kuka plays a crucial role in Germany’s In-
dustry 4.0 initiative, which aims to connect
the physical factory with the virtual world.
“Acquiring Kuka will help Midea ob-
tain key component manufacturing tech-
nologies that Chinese manufacturers lack,
while Kuka can take advantage of Mideaʼs
strong channels in China’s domestic mar-
ket,” says MIC’s Chiang. That should help
Kuka expand its 15% share of the Chinese
industrial robot market.
Yet the deal has also raised concerns
that it will provide China with undue in-
fluence over Germany industry. In a June
interview with Financial Times, Markus
Ferber, a German member of the European
Parliament, said he worried a technology
outflow from Germany to China was oc-
curring, which would mean “the cars of the
future” might be built in China rather than
Germany.
To add to that, European policymakers
and businesspeople are expressing grow-
ing frustration with the restrictions Beijing
places on foreign companies in China. In its
2016-17 Position Paper published in Sep-
tember, the European Chamber of Com-
merce in China noted: “Chinese companies
have successfully completed a number
of eye-catching deals to acquire leading
European companies in a wide range of
areas—including banking, automotive, ro-
botics and critical infrastructure—yet Euro-
pean business is still heavily restricted from
making similar investments in China.”
Not So Fast
But trade tensions aside, while acquiring
premium global robotics assets will certain-
ly boost China’s robotics industry, it is not a
solution in itself. In the view of MIC’s Lin,
the main reasons China lacks the ability to
develop critical robot components such as
controllers, decelerators, and servomotors
is because it lacks corresponding patents
and technologies that are still held by a
handful of advanced countries. Of 3,794
industrial robot patents reviewed in a report
by MIC this year, 61.3% are owned by Ja-
pan, 17.9% by the United States, and 9.7%
26 / CKGSB Knowledge 2016
China is
prioritizing
industrial robots
because it has
no choice. If it
does not take
action, the
supply chain will
leave
Jing Bing Zhang
Research Director
IDC Worldwide Robotics
by Germany—a combined share of 88.9%.
By contrast, China holds less than 1% of
industrial robot patents.
However, acquiring them through
M&A or other means is also not an instant
fix.
“It still takes time for their manufactur-
ing capability of those three key compo-
nents to become world-class in terms of re-
liability, hardness, and fineness,” says Lin.
Gartner’s Van Hoy notes that this is-
sue has rather far-reaching consequences in
terms of the whole industry.
“China currently has a problem sus-
taining the robots it has already installed,”
Hoy says. “When a robot breaks down or
malfunctions it stops the line until someone
qualified to work on the robot arrives. This
can take a while, particularly in Western
China where infrastructure may be an issue.”
This is not to mention that there is also a
shortage of trained personnel to operate and
maintain such advanced machines. “It takes
time, even in a crash-course approach, to
get enough intelligent people into those po-
sitions,” Hoy says.
Considering those issues, robot over-
supply is unexpectedly a problem, especial-
ly because of the generous subsidies Beijing
is doling out to local governments. Accord-
ing to Shanghai-based market research firm
Innova Research, 32 robot industry parks
had been planned or established in China
by municipal governments in 14 provinces
as of the end of August this year. Richard
Jun Li, a vice president at the company,
said in a statement: “At this stage, thirty-
two robot industry parks are probably too
many. The oversupply on the robot industry
park spaces will likely result in the elimina-
tion of quite a few of these parks.”
A July report in Bloomberg News noted
that scams to capture subsidies for robotics
projects are on the rise. Citing the Chinese-
language Economic Observer, the report
said a number of companies with negligible
robotics experience have received large
cash handouts that are not being used for
their intended purpose. Most egregiously,
one company in Nanjing attributed 65% of
its 2015 net profit to robot subsidies.
Age of the Machine?
The bigger issue of automation is less tech-
nical: How to handle the potential displace-
ment of large numbers of Chinese workers?
In May of this year, news broke that
Taiwan-based contract-manufacturing gi-
ant Foxconn had replaced 60,000 of its em-
ployees with robots at a facility in Kunshan,
a city near Shanghai. Foxconn later denied
that it had laid anyone off, and generally
downplayed the idea of automating away
its employees, but still told the BBC, “We
are applying robotics engineering and other
innovative manufacturing technologies to
replace repetitive tasks previously done by
employees.”
Regardless of Foxconn’s current robot/
human employment situation in Kunshan,

Robots assemble a Cadillac near Shanghai
a robot-induced rise in unemployment is a
real threat to China. It is happening else-
where already, albeit on a smaller scale.
In July 2015, the English-language version
of the People’s Daily reported that a fac-
tory in Dongguan operated by the Chan-
gying Precision Technology Company (a
manufacturer of electronics components)
had replaced 590 of its 650 employees with
robots.
The remaining 60 workers monitor
production lines and a “computer control
system,” it said, noting that productivity in
the factory had increased threefold with the
added robots while the product defect rate
had plunged. By July 2017, the company
says it expects to have 1,000 robots at work
controlling 80% of its processes.
Roughly 100 million people work in
the Chinese manufacturing sector, which
contributes nearly 36% of China’s gross
domestic product, but IDC’s Zhang be-
lieves Beijing is prepared to manage the
transition.
“I’m sure the government is aware
of the problem and I would expect they
have a plan to provide new opportunities
for employment,” he says, noting that in-
creased automation will create jobs for
higher-skilled workers such as robot pro-
grammers and technicians. How such a
plan will work in practice, however, re-
mains to be seen.
Chen Ching-kuo, a worker in a Tai-
wan factory of German high-tech polymer
manufacturer Covestro, says he is unwor-
ried in the short run about losing his job to
a robot. Chen is responsible for the dyeing
of running-track materials, and converting
those materials from a liquid to solid form.
“I don’t think it would be that easy for
a robot to do what I do, at least not yet,”
he says, adding that he does not think his
company would hastily replace its human
employees. “They [Covestro] have always
been good to us.”
To be sure, robots will not replace all
manufacturing jobs. They are best suited to
Winter 2016
replacing jobs involving repetitive tasks. Hu-
mans will still be needed for jobs that require
judgment, common sense and creativity.
Yet China faces a dilemma: As its
workforce ages and shrinks, an ever-in-
creasing number of robots will be neces-
sary to maintain productivity levels and
keep manufacturing costs competitive. But
the speed at which China needs to replace
workers is likely to be faster than its ability
to manage their redeployment.
But if China does not automate produc-
tion fast enough, it ultimately risks losing
its prized status as the world’s factory. For
manufacturers, “there is a lot of attractive-
ness to staying in China. It’s a huge mar-
ket, the consumers are there,” says IDC’s
Zhang. “But automated manufacturing in
the US and Europe is eroding China’s cost
advantages.”
He concludes: “China is prioritizing in-
dustrial robots because it has no choice. If it
does not take action, the supply chain will
leave.”
CKGSB Knowledge 2016
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China Insight

High-speed Diplomacy
Long an importer of technology, China’s railways
are now rolling out to the world
By Krystal Hu

Image by Yulong Lli

28 / CKGSB Knowledge 2016


I
n September, after two years and 14
rounds of ministerial meetings, China
and Thailand finally came to an agree-
ment on a planned high-speed railway
project, the first phase of which will cost
$5 billion. But for the 873-km rail line that
will link the Chinese border with Laos and
ports on Thailandʼs coast, that is only the
beginning.
“It is an ongoing and delayed process,
as the construction would not be able to
start as planned this year,” says Aksornsri
Phanishsarn, economics professor at Bang-
kok’s Thammasat University, noting unre-
solved issues ranging from operation and
technical challenges to financial aspects.
The project in Thailand is one of many
of China’s efforts in recent years to export
its high-speed rail to the world. In Turkey,
China helped link the capital Ankara with
the largest city, Istanbul. In Indonesia, the
construction on the Jakarta-Bandung high-
speed railway line will begin this year. This
year the government also announced it will
be building a high-speed railway to con-
nect Singapore and the Malaysian capital
of Kuala Lumpur.
Domestically speaking, China secured
the leading position in world’s high-speed
rail development in the space of a just de-
cade. Its network, already more than 20,000
km and still growing, is longer than the rest
of the worldʼs high-speed rail tracks com-
bined. China’s home-grown CRH380A en-
gine can top 380 km/h.
Now China is targeting the overseas
market for both economic and political rea-
sons. As countries map out plans for high-
speed railways, there is a growing market
for China’s cutting-edge technology. BCC
Research projects the global high-speed rail
market will grow at a five-year compound
annual growth rate of 3.6%, to reach $133.4
billion in 2019.
“Lower-emission and high-speed travel
resulting in shorter transportation times
will drive the high-speed rail market in the
future,” BCC Research analyst Aneesh Ku-
mar wrote in the report.
Exporting high-speed rail is also a form
of diplomacy, and deals usually include
substantial support and preferential financ-
ing from the Chinese government. But giv-
In the past,
travelling on
trains could
take days… air
travel is now my
second choice
Wu Shengtao
Financial Industry Worker
en the costs and complications of building
a high-speed railway, signing an agreement
is nowhere near the time to celebrate. So
far, China has had at least as many failures
as successes, if not more. But once a train
gets rolling, it has a lot of momentum.
Made in China
As little as ten years ago, high-speed rail
was not one of China’s strengths. Lacking
the basic know-how, trains were imported
or built under agreements with foreign
train-makers, including Siemens from Ger-
many and Kawasaki Heavy Industries from
Japan.
“We couldn’t achieve anything without
them,” says Jia Limin, a professor at Bei-
jing Jiaotong University, who now heads
Chinaʼs high-speed rail innovation pro-
gram. “[But] they wouldn’t share any core
technology with us.”
In 2006 the Chinese government de-
cided to indigenize. The country mobilized
more than 10,000 rail experts, researchers
and engineers, setting out to build a 1,310
km high-speed rail line connecting Bei-
Winter 2016
jing and Shanghai, with trains to average
350km/h.
Just five years and $33 billion later,
the line opened. By far the most successful
railway line in China, it was ridden by 130
million passengers last year, or a tenth of
the entire national population. The change
is palpable.
“In the past, travelling on trains could
take days,” says Wu Shengtao, who works
in the finance industry in Wuhan, a major
city in central China. “But now, I can go to
Beijing or Shanghai, almost all the major
cities by high-speed rail within half a day.
Air travel is now my second choice.”
A coordinated push from the central
government, including investment, was a
key for success.
The development of the high-speed rail
network was a prominent part of the 11th
Five-Year Plan, adopted in 2006. That year,
China spent RMB155 billion on rail net-
work development, a figure that ballooned
to RMB800 billion by 2015 as China con-
tinued the expansion of the vast system.
“Our political and institutional advan-
tages allow us to mobilize nationwide re-
sources to accomplish large undertakings
like this,” Jia says.
But the breakneck speed of the growth
of China’s high-speed rail network came
with undeniable costs. In February 2011,
Railway Minister Liu Zhijun was removed
from office on charges of corruption, ac-
cused of accepting millions of dollars in
bribes. Months later in July, two high-speed
trains collided near the city of Wenzhou
south of Shanghai, killing 40 people and
raising serious doubts about the quality and
safety of China’s railway system.
Jia Limin lays blame for the tragedy on
operational and management failings. “The
accident wasn’t caused by technology is-
sues,” he says.
Rolling Out
Needless to say, the incident cast a dark
shadow over the industry for some time.
But things turned around rather quickly,
with strong continued growth of the domes-
tic network. But with China’s economic
growth slowing down, and most major lines
already in operation, China’s large-scale
CKGSB Knowledge 2016
/ 29
China Insight
rail industry had to find other ways to keep
the speed up. Exports were a natural choice.
Over this same period, the development
of faster and greener transportation systems
has become the common goal of both de-
veloping and developed countries, although
the ability to construct such systems is pos-
sessed by only a few countries, specifically
China, Japan and Germany.
“We have the ability, they have the
need,” says Jia, “That’s why we have to go
out.” He believes China has several advan-
tages over competitors in terms of exporting
high-speed rail, including price. According
to a 2014 report from the World Bank, the
cost of building high-speed rail in China is
one-third lower than in other regions.
And the economic benefit of selling
high-speed rail is more than the railway
itself. The business model was first de-
veloped in Japan with the famous Bullet
Trains, where rail companies usually own
or operate shopping centers, hotels, tourism
businesses, and construction companies. It
is a captive audience that China can capital-
ize on.
“One thing that usually comes with
high-speed rail is that China can attach
more economic projects and cooperations,
increasing the chances of China’s going out
(policy) in general,” said Agatha Kratz, an
Fast, Long and Still Growing
China’s high-speed rail network is the world leader
Under Construction or Planning
Opened
Source: www.travelguidechina.com
30 / CKGSB Knowledge 2016
Associate Policy Fellow at the European
Council of Foreign Relations and a special-
ist on China.
China Railway Rolling Stock Corpora-
tion, for example, has already established a
facility in India that may handle the local
production of parts or whole trains in the
future. Kratz also believes China is selling
high-speed rail as a flagship product to in-
form the world of its capabilities in terms of
building high-technology products.
“The going out of China’s high-speed
rail is not only the export of technology and
devices,” says Jia. “It is also the spread of
our culture and influence.”
But that may be a bit optimistic. More
than 20 countries are currently negotiating
with China on building high-speed rail, ac-
cording to a government statement, but to
date, China has only actually completed
one. In 2014, the rail line linking Turkey’s
capital of Istanbul and the largest city An-
kara was opened up—and it has not been
a smashing success. The ostensibly high-
speed train usually travels mostly at 60
km/h with a top speed of 110 km/h, around
the same speed as a motor car.
Kahar Tursun, a software developer
from Turkey, says he believes the quality
of the train is much inferior to the ones in
China and in Europe.
“From my experience, it is not a high-
speed rail. It is just a fast train rail, and the
seats are not comfortable.” Tursun says.
“The Turkish government wants to have a
high-speed train system for a cheap price,
so the quality is proportional to the amount
of money they invested.”
Other projects are going even less
smoothly. China has experienced setbacks
in the US, Mexico and Venezuela, where
initial agreements on constructing high-
speed rail have been either held up or ter-
minated by a mixture of technical, political
and financial problems. Last June, US rail-
way firm XpressWest ended its joint ven-
ture with the China Railway International
(CRI) due to difficulties related to timely
performance and CRIʼs challenges in ob-
taining the required authority to proceed
with necessary development activities, ac-
cording to the company’s website.
Jia Limin doesn’t buy that explanation,
however.
“The real challenge for exporting
doesn’t lie in technology, cost or our
management ability,” he says. “What re-
ally matters here is the political relationship
among countries.”
Hard Business
Above all, selling high-speed rail to other
countries may not be a profitable business.
Due to vast investment, only three high-
speed lines in the world have been shown
to be profitable—Paris-Lyon in France,
Tokyo-Osaka in Japan, and the Beijing–
Shanghai line in China’s system. The ma-
jority require large government subsidies.
“High-speed rail can only transport
people, not goods,” said Zhao Jian, eco-
nomics professor at Beijing Jiaotong Uni-
versity. Profitable high-speed rail usually
requires very large and stable passenger
traffic.
Zhao believes that the countries for
which China is planning to build high-
speed rail projects mostly fall short of the
population density and market needs for
profitability.
“They only have the need to build high-
speed rail if China offers the investment,”
he says. “To us, it’s a deal that we are sure
to lose money on.”

Win Some, Lose Some
Not all of China’s foreign rail projects have gone smoothly
Source: Public Information
But given that high-speed rail has sig-
nificance beyond profit for China, the gov-
ernment has thrown its weight behind the
effort regardless. And in a highly competi-
tive market, one of China’s secret weapons
to win bids is flexible funding policy and
low-interest loans.
One example is how China beat Japan
in the bid for the Jakarta-Bandung high-
speed railway last year. Because Japan re-
quired a government guarantee, Indonesia
awarded the $5.5 billion project to China
Railway International Co. Ltd., a subsidiary
of China Railway Group Ltd., which didn’t
require such a provision.
More widely, China has been pushing
for the development of a comprehensive
rail network in Southeast Asia, the key area
of its One Belt One Road initiative—a huge
infrastructure investment program aimed at
integrating China with Asia and Europe.
As part of this diplomatic strategy, China’s
policy banks would play a role in filling the
financing gaps for infrastructure construc-
tion in developing countries. The project in
Thailand is one of them.
“China’s railway plan in the region will
help its landlocked inner western provinces
to gain access to the sea, linking from Yun-
nan via Laos to Thailand and hope to link
with other parts of ASEAN region as well,”
Phanishsarn of Thammasat University says.
Zhao Jian is not convinced.
“This will result in a more severe debt
burden on the central government,” says
Zhao. He doesn’t believe that many devel-
oping countries such as Thailand and Indo-
nesia will be able afford the construction
and operation costs of high-speed rail. “It’s
a time bomb for the One Belt One Road ini-
tiative.”
Agatha Kratz also observed that the
Chinese government is beginning to change
its strategy after realizing that economic
generosity doesn’t always guarantee po-
litical return, as has been shown in China’s
relations with Myanmar, where economic
aid and investments have so far not borne
much fruit.
“The commercial liability is taking a
bigger part [in the thinking],” she says.
“China realizes it can’t just give the money
away.”
The Future Rival
While the marketing of China’s high-speed
rail is still being explored, Jia and his col-
leagues have already begun working on a
new generation train to solve the problem
of cross-border transportation. It will run
at a top speed of 400 km/h and have the
advantage of being able to handle cross-
border changes in gauge—the distance be-
tween the two rails.
“The train we’re now developing will
have wheels that can be adjusted to fit
various gauges on other countriesʼ tracks,”
Jia says. “It can travel from Singapore to
Spain, crossing countries without changing
wheels.”
The US, perhaps because it is so be-
hind the rail curve, is working on another
Winter 2016
innovative transportation system, known
as Hyperloop. The concept entered public
awareness when Elon Musk, the CEO of
SpaceX and Tesla Motors, first proposed it
in July 2012. In Musk’s vision, the Hyper-
loop would be designed as a bullet train in a
vacuum tube, which could accelerate safely
to 1,225 km/h. Some companies based in
Los Angeles are currently competing to
make the idea feasible, and they already
have their eyes on overseas markets, partly
because of the political issues and expen-
sive land in the United States.
One of the companies is the Hyperloop
Transportation Technologies, which has
been in negotiation over the past year with
the Slovakian government to build hyper-
loop routes from Bratislava to Vienna and
Budapest. Dirk Ahlborn, the head of Hy-
perloop Transportation Technologies said
during a presentation that he expected to
see stage one built by 2020.
But some experts are not as optimistic.
“I would estimate 10 to 20 years after
Hyperloop’s ‘Kitty Hawk’ moment, that
some sort of evacuated tube transporta-
tion can come into service, ” says Alina
Alexeenko, an astronautics professor. She
has taught a hyperloop design class at Pur-
due University since last year. Alexeenko
also believes hyperloop will co-exist with
high-speed trains rather than replacing
them, serving instead as a super-fast cargo
transport.
At least for now, China seems to be
safe from competition from speculative
technologies. And meanwhile Professor Jia
and his team haven’t slowed down their ef-
forts to make China’s trains more appealing
to international markets. They have a lot of
help as well—government support remains
strong in high-speed rail technology inno-
vation, and they are working towards a train
system with a top speed of 600 km/h, ac-
cording to the next Five-Year Plan drawn
up the central government.
Kratz is more measured in her predic-
tions.
“I don’t think the overseas market will
have explosive growth as China is hoping
for, it won’t be 20 countries building Chi-
na’s high-speed rail at the same time,” says
Kratz. “[But] it will get there.”
CKGSB Knowledge 2016
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China Insight Winter 2016

Faith Mangagement
Wealth management products have helped bring
shadow banking mainstream
By Tom Nunlist
Image by AMAO

CKGSB Knowledge 2016

/ 33
China Insight
O
n a certain day in October, 2015, a
group of disgruntled investors gath-
ered in Beijing to lodge a complaint.
They had bought so-called wealth manage-
ment products (WMPs)—investment in-
struments somewhat similar to mutual fund
shares—from a company called Global
Wealth Investment, which had invested in
loans backed by Hebei Financing Invest-
ment Guarantee, a state-owned guarantor
managing nearly $8 billion in assets which
collapsed earlier that year, owing about $98
million to Global Wealth, according to the
financial magazine, Caixin.
“We gave great weight to Hebei Fi-
nancing’s guarantees,” one investor told
the Financial Times. “We knew it had the
backing of the state.”
On the same day, about 200 investors
protested outside the Beijing offices of Ping
An Insurance, which had sold around RMB
100 million of products from Gold Match
Silver Fund Management, whose top exec-
utive had disappeared. Ping An, the inves-
tors claimed, had swindled them.
So far, such defaults (and the angry in-
vestors that accompany them) have been
uncommon in China’s complex and un-
der-regulated wealth management product
space. But the now-gargantuan industry,
which according to Bloomberg comprised
$3.9 trillion in holdings as of June 30, 2016,
up 11.8% in six months, may pose a large
risk to China’s financial system.
This August, the International Mon-
etary Fund issued warnings on China’s
credit boom risk, specifically calling out
wealth management products as a key part
of the problem. China’s overall debt level
has risen from about 150% in 2008 to 240%
of GDP today, and according to IMF’s
statement, the state banks are repackaging
at-risk loans into “investments,” which cos-
metically improves their balance sheets, but
does not fix the core problem—high levels
of non-performing loans.
“Economic losses are real whether
you recognize them or not,” says Patrick
Chovanec, Managing Director and Chief
Strategist at Silvercrest Asset Management
Group in New York. “Somebody is going
to bear it.”
There are many risky aspects of the
34 / CKGSB Knowledge 2016
This is not
something that
is separate from
the banking
system. It is
an integral part
of the banking
system
Patrick Chovanec
Managing Director and
Chief Strategist
Silvercrest Asset
Management Group
wealth management products industry in
China: use of the money to fuel inefficient
or even troubled state-owned enterprises, or
to buy property and stocks—both bubble-
prone markets in China—cross ownership
of WMPs by institutions, and the rolling
nature of the system whereby new prod-
ucts help cover the liabilities of previously-
issued products. The web of risk, and the
scale of it, has analysts like Charlene Chu,
of Autonomous, a global equity and credit
research firm, worried about the possibil-
ity of a chain reaction similar to the 2008
financial crisis when the US mortgage mar-
ket buckled under similar strains.
“We call off-balance-sheet WMPs
a hidden second balance sheet because
that’s really what it is—it’s a hidden pool
of liabilities and assets,” Chu to Bloom-
berg earlier this year. “In this way, it’s
similar to the Special Investment Vehicles
and conduits that the Western banks had
in 2008.”
One of the most troubling aspects is
the involvement of everyday people across
China, who sometimes risk their entire sav-
ings in these products. Many of the prod-
ucts have all the trappings of guarantees
without a guarantee, and the losers from
Global Wealth and Gold Match did not just
lose money, they also lost trust. A broader
crisis of faith in the system could turn off
the money taps from ordinary investors,
leading to a liquidity crunch, and likely also
widespread anger.
“If they are selling investment products
and they are understood to be investment
products then that is not necessarily a prob-
lem,” says Chovanec. “Except that’s not
how a lot of people [understand] it.”
So far, however, most people are still
making money, and lots of it. According
to China Central Depository and Clearing
Co., the first central securities depository
approved by the State Council in China,
banks and other lenders made RMB 117
billion ($17.3 billion) from WMPs in 2015.
But it is unclear how long the good times
will last.
Simple Product?
“Wealth management product” is a term
used to describe off-the-books financing in-
struments used by banks in China. Buying
one is somewhat similar to buying shares
in a mutual fund, except the return is fixed,
and it usually has a set maturity which is
typically short. It usually unclear what the
underlying assets are.
Each product is created individually
and so terms, interest rates, maturity and
other details vary considerably. But gen-
erally speaking, on average they cost in
the neighborhood of a few thousand dol-
lars, mature in about six months and typi-
cally carry an interest rate return of 3-5%
(although sometimes the return can reach
10% or greater), which is considerably bet-
ter than bank deposit rates. For comparison,
the savings account interest rate at ICBC

(the world’s largest bank by assets) was
set at 0.3% in September, and the one-year
time deposit rate was just 1.75%.
WMPs are sold directly by banks, and
also through third parties. Confusingly,
they are also often sold by third parties at
bank locations, a distinction that is not al-
ways clear to buyers. The proceeds are then
invested or re-invested, and everything is
game, from the stock market to construc-
tion projects.
But the basic concept is simple: “WMPs
function as both loan substitutes and depos-
it substitutes,” says Jack Yuan, associate di-
rector, financial institutions at Fitch Ratings
in Shanghai. In other words, WMPs are an
instrument of shadow banking.
Wealth management products are is-
sued by just about all banks in China, from
giant institutions, like ICBC, to mid-tier
provincial banks. The largest group of buy-
ers is individual mass-market investors
who, according to Bloomberg, in Septem-
ber held roughly half of them.
These products are not inherently ex-
citing, were it not for their enormous scale
and the speed of their overall growth in re-
cent years. According to the China Central
Depository and Clearing Co., in 2011 they
amounted to RMB 4 trillion, and have since
ballooned more than six fold.
Out of the Shadows
WMPs have become a central part of Chinese banking
Source: Bloomberg, China Daily
“Growth started around 2010, and it
was for sure impressive growth every year,”
says Denis Suslov, a financial industry ana-
lyst at Kapronasia in Shanghai. “2010, ʼ11,
ʼ12 saw at least 20% growth each year.”
There are factors driving growth on
both sides, supply and demand. On the de-
mand side, there are relatively few invest-
ment options for ordinary people in China
outside of property and the stock market.
In 2010 and 2011, when wealth manage-
ment products really began to take off, the
inflation rate was more than 4%. Match that
with China’s low deposit rates meant sav-
ing money was the same as losing it, and
people were happy to have an alternative.
The supply side is a bit more compli-
cated. Chinese banks, like banks in any
country, need to turn a profit, but they also
need to meet the demands of the state in a
system that is not purely commercial. So
far, WMPs have been a reliable source of
good revenue for them, but also a tool to
help them meet their policy obligations.
As the government pushes banks to deal
with non-performing loans (NPLs), many
to state-owned companies, banks can use
WMPs to move them off the books. The
IMF also warned against this in August.
“Issuing more products off balance
sheet is a way for them to make their finan-
Winter 2016
cial metrics and their balance sheets look a
little bit nicer,” says Yuan. “They don’t re-
port NPLs that are in the WMP pools.” But
to really understand wealth management
products and their place in the system, it is
necessary to take a look at the development
of banking in China over the past decade.
So-called shadow banking has long
existed in China, and it is not inherently a
negative. The formal banking system, be-
ing a state-owned operation, preferentially
lends money to big state-owned enterprises,
the consequence being that there are many
under-served customers starved for credit,
as well as the aforementioned demand for
investment vehicles. Shadow banking can
fill in the lending gaps for both parties, and
to good effect.
But a sea change occurred with the 2008
global financial crisis and the massive Chi-
nese government stimulus that followed.
As Chovanec explains, the stimulus loans,
funneled largely through the state banks,
put huge stress on their books, which in
turn caused concern in the government.
“Starting around late 2010, there was
an effort by the PBOC to try to rein in that
lending, and it involved raising the reserve
ratio [among other things],” says Chovan-
ec. However, if economic growth was to
continue on target, projects needed to be
funded. “What happened was banks figured
out ways of making loans besides making
loans.”
Those other ways of making loans were
wealth management products: effective,
profitable and off the books. With these
products, banks could improve their bal-
ance sheets, and lend with a lot less regula-
tion, including lower capital ratios.
By last year, they had risen to RMB
23.5 trillion, about 35% of China’s GDP—
meaning shadow lending is no longer a
dark corner of the financial system.
“This is not something that is separate
from the banking system,” says Chovanec.
“It is an integral part of the banking system.”
Investment to Nowhere
Another key event that helped shape the
current system occurred in 2012. Original-
ly, wealth management products were used
as money market funds, the money market
CKGSB Knowledge 2016
/ 35
China Insight
being the liquidity used for short-term bor-
rowing between banks and other financial
institutions. However, when money mar-
ket yields fell in 2012, issuing institutions
could not achieve the returns they needed to
repay the higher interest on wealth manage-
ment products.
“The real transformation has been a
move to add duration and credit risk to the
assets backing WMPs,” says Logan Wright,
a director at Rhodium Group who leads the
firm’s China Markets Research. Those as-
sets could be something like a housing
development, or a coal mine, projects that
may not create a return for several years.
According to a statement in September
by the China Banking Wealth Manage-
ment Registration System, about 40% of
the WMP funds in the first half of 2016
went into bonds, 17.7% into cash and bank
deposits, and 16.5% into “non-standard
credit assets” (a hodgepodge of loans)—as-
sets that are longer term. But, good assets
in China have begun to dry up, kicking off
what Wright calls a “search for yield” that
can keep the system moving.
“This is how you have seen the explo-
sive growth of margin financing during the
equity markets [boom], the commodities
futures volume explosion in April, as well
as some of the rally in the corporate bond
market right now,” says Wright.
Investment Breakdown
WMP funds are going almost everywhere
Equity investments
8%
3%
15.6%
Non-standard
credit assets
22.9%
Cash deposits
Source: Nikkei Asian Review
36 / CKGSB Knowledge 2016
But this is where things get start to get
murky—unlike a mutual fund, which has
a prospectus, there’s no way to easily fig-
ure out what precisely a particular wealth
management product is backed by. One
Shanghai professional who has occasion-
ally purchased WMPs said she had no idea
what her money was funding. Rather, she
understood only the basic terms of maturity
and interest rate, as well the name of the in-
stitution that sold her the product.
“There are just some general statements
that there are investment risks and that
these wealth management products are not
deposits,” says Suslov. “The risk notice is
not really adequate.”
Customers mostly buy products from
reputable institutions that may only im-
plicitly stand by them—it is not really the
bank’s liability, because it is classed as an
investment product.
This gets to the heart of the odd eco-
nomic disconnect inherent in WMPs. In a
traditional investment, the investor would
assess the risk and price accordingly,
knowing there is a chance of losing money.
But with WMPs, customers place the bet
basically on the institution that is marketing
the product, which may be selling an off-
the-books amalgam, or something created
by a third party.
While few WMPs have so far gone
Other
29.5% Bonds
21.5%
Money market
bust, and the state banks pushing them
have demonstrated their willingness to
guarantee the investors’ principal. Accord-
ing to Reuters, CITIC did just that in 2012
when a wealth management firm marketed
by the bank missed a $1.12 million pay-
ment. So why would banks elect to repay
the investors of failed products despite
having no legal obligation to do so?
“Banks are actually, formally or infor-
mally, on the hook for a lot of things not
reflected on their books,” says Chovanec,
reinforcing the point that the shadow bank-
ing system enabled by wealth management
products is, in fact, central to China’s pres-
ent financial system.
This fact of being informally on the
hook, along with the size and structure of
the system, poses what may be enormous
risks.
The Big One
The most immediate problem is liquidity
risk, in other words a sudden shortage of
cash, which stems from that switch begin-
ning in 2012 from using WMPs for money
market funds, to assets like property invest-
ments.
“One of the key problems with wealth
management products is that there is quite
a large asset/liability mismatch,” says Yuan
of Fitch, echoing Wright’s explanation of
how these products transformed. “You are
financing medium to long-term assets with
very short-term funding.”
Because WMPs typically mature in
a matter months, funding for big projects
needs to be continually rolled over by is-
suing new products to cover old ones and
keep the cash flow going. This creates a
tricky situation of dependence on the con-
tinued sale of WMPs. Should the investing
public become spooked, say by a big single
default, the money tap could turn off.
Not only are they heavily used by most
banks, but they are particularly relied upon
by mid-tier state banks, those that lack the
enormous deposit bases of China’s largest
state banks. Some smaller banks are issuing
far more WMPs at this point than they are
attracting deposits.
“A withdrawal of WMP funding [at
mid-tier banks] could cause them to have

a major liquidity crunch,” says Yuan. “If a
number of them go to the interbank market
at once… they may have to go in the last
instance to the central bank.”
“It could get quite messy,” he adds.
This is partly why institutions have
been willing to cover losses, to quell any
investor jitters before they could get out of
hand. According to the Financial Times,
when Hebei Financing went bust, 11 shad-
ow banks wrote an open letter to the He-
bei government asking for a bailout, lest a
bevy of WMPs default, including the ones
that people protested over. The letter ap-
pealed to concerns about social stability.
There are a number of other amplify-
ing factors on top of this, most notably the
cross-ownership of WMPs between banks,
which amounts to 15% of WMPs, accord-
ing to official data. Such a practice creates
the possibility of a default chain reaction,
but deleveraging the situation is made dev-
ilishly difficult by the very nature of the
system.
Failure is Not an Option
In the short term, any attempt to tighten
rules on WMPs could itself cause a liquid-
ity crunch. But the deeper concern may not
actually be WMPs but the apparent need to
keep economic growth running at a smooth
clip.
“There’s a consequence to reigning it
in, which is you don’t hit the GDP target,”
says Chovanec. “So what happens? You
don’t reign it in.”
The China Banking Regulatory Com-
mission issued new draft rules in Novem-
ber aimed at curbing WMPs, specifically
the repackaging of high-risk loans. But
according to The Wall Street Journal, the
broad language still gives banks quite a bit
of leeway in interpreting the requirements,
meaning they may be ineffective.
“China wants to have a correction with-
out having a correction,” Chovanec says.
The bottom line is that investors believe
that the government will not allow anything
to fail, at least not in a widespread fashion,
the net effect of which is to throw off the
rational process of investment.
“When the system is structured in this
way, there is a tendency for asset misallo-
The real
transformation
has been a move
to add duration
and credit risk
to the assets
backing WMPs
Logan Wright
Director
Rhodium Group
cation because… losses will be socialized,”
says Yuan.
Put another way, it means the inherent
potential of a given investment to generate
returns is less important than the good faith
of the backer—in this case the government.
Wright holds a similar view: “WMPs
are a particular evolution in response to a
system in which things aren’t assumed to
fail. That’s the central part of this story.”
As Wright, Chovanec and Suslov all
see it, it is a moral hazard. And it may be
the case that it is an unavoidable one, in the
context of the Chinese economy.
“If WMPs didn’t exist, someone would
have to create them,” says Wright.
That begs the question: What then can
be done?
Paradigm Shift
Perhaps the most obvious fix would be to
move WMPs out of the dark, and the Chi-
Winter 2016
nese government is already working to do
this. In October the PBOC began requiring
commercial banks to count them as part of
their overall credit, according to The Wall
Street Journal.
The second thing is clarifying risks to
the buyers of WMPs, probably by making
them more transparent.
“What is especially important here is
making it really clear what the underlying
assets are,” says Suslov. “Often times inves-
tors don’t understand, and often times the as-
sets can be really complex and complicated.”
Next would be targeting the use of the
WMPs as instruments, particularly because
of the asset/liability mismatch. According
to Wright, the entire world is moving to-
ward longer-term, more stable bank financ-
ing, while China has done the opposite with
short-term WMPs.
Really cracking down on them could be
painful.
“It would cause widespread disruption,”
says Wright, especially to the smaller banks
relying upon them. “But because they are
so short term in nature…you would pretty
rapidly roll off 70-80% of WMPs in 3-6
months.”
However, Wright also notes that WMP
growth is already beginning to slow down
on its own, because good assets are drying
up.
But the longer term implications are
more fundamental to the way the Chinese
economy operates, that is, the current reli-
ance on credit for growth, and the fact that
everything is at least implicitly guaranteed
by the government.
As Chovanec puts it, by far the worst
effect of “trying to run an economy with no
losers” is that the market signals about what
to really invest in don’t get sent, which
pushes investment into things like real es-
tate that keep the economy growing at least
on the surface. As he sees it, at some point
losses have to be accepted.
But the good news is there is still ample
opportunity out there in the real economy.
“I think there are lots of areas in Chi-
na’s economy that can generate real pro-
ductivity gains, and you don’t even have to
invent anything,” Chovanec says. “But the
signals have to be [there].”
CKGSB Knowledge 2016
/ 37
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China Insight Winter 2016

Bargaining on Brexit
Brexit has changed China’s relationship
with both the UK and the EU
By Douglas Bulloch

Image by Wei Bingnan

CKGSB Knowledge 2016

/ 39
China Insight
O
n the morning of June 24th, 2016,
China woke up to witness an un-
expected drama unfolding half a
world away. The previous day, millions of
UK citizens had voted on whether the UK
should remain in the European Union, and
all opinion polls, betting and market expec-
tations pointed firmly towards ‘Remain.’
But as the early results came in, as China
was eating its breakfast, the startling pros-
pect of Brexit became a reality.
With typical British understatement,
Mark Pinner, Managing Director and Part-
ner at Interel China, a public affairs and
government relations consultancy, called
the result “a bit of a shock.”
The reasons divined for the ‘leave’
vote were many, but one consistent theme
was a desire of British voters for Britain
to make its own decisions, and to chart
its own course in the world. The effect,
however, could be to redraw the economic
map, requiring companies and govern-
ments to rethink long-held assumptions
concerning market access and investment
strategies.
Furthermore, although the EU is for
now China’s largest trading partner—ac-
counting for nearly €190bn in imports
in 2015 and €321bn in exports, or nearly
16% of China’s total exports—losing the
UK will mean the EU will once again come
second to the US.
China and the EU
How exactly Brexit would affect China’s
relations with the EU prompts much dis-
agreement.
Writing in September about China’s
relationship with the UK, Jie Yu—China
Foresight Project Manager at LSE IDEAS,
the foreign policy think tank of the London
School of Economics—highlighted how it
complicates Chinese investors’ plans to en-
ter the 500m-strong European market, not-
ing that “Brexit has indeed diminished Bei-
jing’s hopes of treating the UK as a strong
advocate for China in the EU.”
But Song Gao, Managing Partner at
PRC Macro Advisers in Beijing, an eco-
nomic forecasting firm, disagrees, arguing
that investment in the EU is small com-
pared to exports.
40 / CKGSB Knowledge 2016
It is very likely
that the UK and
China will sign
a free trade
agreement after
Brexit
Song Gao
Managing Partner
PRC Macro Advisers
“The Chinese… have other ways to
penetrate the EU market, for example
[through] Greece,” he says, noting Chinese
support of the Greek government and proj-
ects like ports.
In a sense, they are both right. Chinese
investment in the EU has so far been lim-
ited, but it is on the rise. China’s invest-
ment in 2013 was only €4.7 billion out of
a total foreign direct investment into the
EU of €621 billion, but in 2014 it rose to
about €8 billion, or 6.5% of €119 billion
total FDI, and has certainly grown further
since.
Song, however, focuses on the more
political dimension of the economic risk.
“China is apparently going to lose an
ally within the EU Council,” says Song.
“That could [threaten] China’s pursuit
of free market status designation from
the EU.” According to the terms of the
agreement reached to allow China into
the World Trade Organization in 2001,
China was to be given “market economy
status” at the end of 2016. However, the
EU balked earlier this year, due in part to
issues of alleged steel dumping related to
China’s continued support of state-owned
enterprises.
Other fair trade issues have further
ratcheted up the tension. The €670 million
Chinese acquisition of German chip manu-
facturing technology company Aixtron was
held up in October. The breakdown in the
deal was due at least in part to German se-
curity concerns, but broad issues of fairness
and reciprocity likely also played a part.
Chinese firms have been on an M&A spree
in recent years, prompting other countries,
Germany not least among them, to com-
plain that foreign firms are restricted from
acquiring similar companies in a huge
range of Chinese industries.
It would appear, therefore, that there
are more potential roadblocks to China’s
EU investment strategy whether the UK re-
mains a member or not.
Golden Relationship?
Also in play is the so-called ‘Golden Rela-
tionship’ between the UK and China, which
has been assiduously cultivated in the past
couple of years.
Part of this relationship is based on in-
stitutional cooperation and access to Lon-
don’s financial services and currency mar-
kets, but the more important consideration
for the UK is China’s growing investments
in infrastructure. The Hinkley Point C nu-
clear power station is the best example. De-
spite doubts following the historic vote, the
project made headway in the post-Brexit
UK with final approval for the deal given
by the UK government in September.
Song Gao considers this kind of infra-
structure investment rather than access to
the EU as being the key factor in China’s
future relationship with the UK. The op-
portunity derives from the perceived need
for “the UK to promote investment in infra-
structure to offset the economic headwinds
from leaving the EU.” That in turn will cre-
ate more investment and financing opportu-
nities for China.
“The Chinese would love to jump in
and provide financing for infrastructure in-
vestment in the UK,” Song says.
Salvatore Babones, Associate Professor

of Sociology at Sydney University, Austra-
lia, is less optimistic about China’s long-
term interests, but instead sees opportunity
for Britain.
“The UK may be willing to seize op-
portunities to fleece the Chinese govern-
ment on big financial deals,” says Babones.
“The English have had an eye for a good
deal for half a millennium now, and if Chi-
na wants to subsidize British infrastructure,
the UK government will let them.”
But Brexit also throws London’s status
as a financial capital into question, and that
may very well put a hold on many deals.
“There will be more hesitation before
major commitments in the financial area
[until] the picture gets clear,” says He Jun,
Career China Fund Manager based in Hong
Kong.
However, the main problem with gaug-
ing the consequences of Brexit on the Chi-
na-UK relationship is that the process is un-
certain, and the outcome unknown. There
is now a little more clarity with the promise
to invoke ‘Article 50’ by the end of March
2017, implying a likely exit date by April
2019. But that also means nothing can be
formally discussed until March of 2017,
The EU is China’s biggest trading partner
Source: Bruegel
after which the negotiations promise to be
highly complex.
“Britain can’t really undertake detailed
trade negotiations with other countries until
it leaves the single market,” says Pinner.
Nevertheless there is a fairly strong
impression that China will want to strike a
trade deal with the UK.
“It is very likely that UK and China will
sign a free trade agreement after Brexit,”
says Song. “[Brexit] will simply make Brit-
ain more flexible in terms of negotiating
trade agreements with third-party countries
outside of the EU.”
To that end, high-level discussions be-
tween the UK’s Chancellor of the Exche-
quer and one of China’s Vice-Premiers
have been scheduled for November, ac-
cording to an announcement in October by
Liu Xiaoming, China’s Ambassador to the
UK.
Downsides
There are, however, some specific chal-
lenges that confront China in the short term.
The most obvious is the effect on China’s
currency of the Brexit vote, and now also
the US election of Donald Trump.
Partners in Trade
Winter 2016
“The new RMB overall currency policy
now is targeting a basket of currencies,”
says Song. “So [while] Brexit will have a
huge downside pressure on the Pound …
the Chinese currency has to follow.”
He adds that policy makers worry the
market will see such depreciation not in the
context of targeting a basket, but in the con-
text of a broader weakening of the Chinese
economy.
The bigger concern though is about the
spill-over effect of Brexit on the entire Eu-
ropean Union, the fear being exits of more
countries, such as Italy, or even a collapse
of the Eurozone. “The Chinese are extreme-
ly worried about this prospect,” Song says.
He Jun concurs, though is perhaps more
sanguine.
“It is obviously hard to gauge exactly
what Brexit means to the world ultimately,”
says He. “So far the Chinese government
is taking a relatively relaxed attitude on the
issue and their chief concern is whether it
will create another round of 2008-style
global systematic risk.”
Babones takes a contrasting view, be-
lieving that the problem will be less about
economics than politics.
CKGSB Knowledge 2016
/ 41
China Insight
Chinese officials greet British PM Theresa May at the G20 in Hangzhou
“Post-Brexit Britain will inevitably
move closer to the United States,” he says.
“Chinese policy coups like the Hinkley
Point nuclear contract and Britainʼs deci-
sion to join the AIIB will be less likely in
the future.”
Upsides
There are some bright spots, however. The
most obvious opportunity stems from the
immediate decline—as much as 18% by the
end of October—in the value of the Pound.
“[This] makes Britain very attractive
to investors,” says Pinner. “Tourism from
China is booming and investment in … real
estate has jumped very significantly, too.”
Song goes further: “Chinese SOEs have
been instructed to purchase technologies
and more productive sectors from foreign
countries, so the Chinese see this as a great
opportunity for them to increase their ODI.”
In a more strategic sense, however, the
biggest opportunities may not be economic.
“The Chinese government sees a less
unified Western world more as an oppor-
tunity politically,” says He Jun, which
“leaves the way open for China to gain
concessions [and]… win support from at
least some of the European countries on
some issues.”
42 / CKGSB Knowledge 2016
Babones agrees, further speculating
about the opportunities thrown up by a
weakened EU.
“The post-UK European Union is likely
to be more amenable to—or vulnerable to,
depending on your point of view—Chi-
nese diplomatic initiatives as the overlap
between the EU and NATO declines,” he
says.
But the division also has the potential
to overshoot, which is a big concern for
China.
“[The EU may] become more conser-
vative in terms of global trade.” says Song.
That touches on the wider current phe-
nomenon of de-globalization, with which
Brexit has been identified.
Walling Off
In the broadest sense, Brexit’s challenge is
philosophical as it points to a fragmentation
of the existing institutional order. In this
way, it is linked to other trends around the
world, including a rise in protectionism and
a threatened reversal of the long post-war
trend towards increasing trade and interde-
pendence.
“The growing anti-globalisation senti-
ment in developed countries is very much
noticed among Chinese academics and
investors,” He Jun says. “Brexit should
certainly be viewed as part of that develop-
ment.”
Indeed, He Yafei, Vice-Minister of
Overseas Chinese Affairs Office of the
State Council, made exactly this point a
week after the vote, stating that “from a
strategic and global perspective, Brexit
may be defined as the first wave of anti-glo-
balization and rising populism that washes
over the world.”
In the wake of United States’ election
of Donald Trump as president, he may have
been correct.
At the most recent BRICS meeting in
India in Mid-October, President Xi Jinping
himself warned that a “rising tide of protec-
tionism and anti-globalization was endan-
gering the world economyʼs still fragile re-
covery” blaming “deep-seated imbalances
that triggered the financial crisis.”
But Salvatore Babones, whose academ-
ic work focuses on de-globalization, says
that this is not new.
“The falling trade between China and
the rest of the world is part of a long-term
super-cycle,” he says. “The era of increas-
ing globalization came to an end in 2008.”
Babones also sees de-globalizing forces
at work in China’s efforts to carve out a

stronger sphere of influence in the South
China Sea. And while this may not rep-
resent an absolute retreat from trade, it is
shifting toward a system that is more re-
gional, rather than truly global.
Re-globalization and Brexit?
But what Babones sees as ‘de-globaliza-
tion,’ others see as ‘re-globalization’—a
response to deglobalization that envisages
creating new patterns of trade, perhaps re-
gional or sectoral, as a way of forestalling
an expected downturn in global trade. Song
sees China’s efforts in the last few years,
in particular with the One Belt One Road
(OBOR) initiative and its associated insti-
tutions, as a specific response to China’s
long-held expectations of more difficult
trading conditions.
“The political dynamic is definitely
shifting against globalization and this trend
is not going to reverse anytime soon,” says
Song. Expanding on OBOR’s reach into
the central Asia, he adds that the Chinese
initiative “[involves] the corridor that has
been very much excluded from the previ-
ous wave of globalization.”
“[These areas] lack the infrastructure
[and] financing to facilitate trade,” he adds.
And this brings the whole question back
to a wider context in which Brexit could be
a remarkable opening for China. It is within
the potential for “re-globalization,” a re-
thinking of the globalization process, that
China may see the opportunity to deepen its
relationship with the UK—and with a more
fragmented EU—to complement its long-
standing efforts to promote regional trade
initiatives from a more global perspective.
While the UK may be a relatively small
economy, it is very global in outlook, with
strong connections and institutional pres-
ence all around the world. In that sense, the
UK leaving the EU just as its relationship
with China has matured is seen, in Song’s
words, as a “great opportunity for China
and Great Britain.”
Clearly the huge uncertainties that still
Winter 2016
hang over Brexit make prediction difficult,
but inevitably China will need to rethink
its relationship with the EU. Having lost a
sympathetic voice on the inside, there is a
danger that the EU will now be more suspi-
cious of China’s intentions, as recent deci-
sions on mergers clearly show. Neverthe-
less, a more flexible UK will provide some
very obvious opportunities for Chinese
investment, just as the EU will maintain
an overwhelming interest in continuing to
improve trade.
The key danger for China is if Brexit
goes badly wrong and somehow helps to
trigger a global downturn, but as the chanc-
es of that slowly diminish, China may find
itself moving beyond the shock of the event
and looking toward what is next.
“We should be confident in a promising
future for China-UK relations,” said Vice
Premier Liu in October, when announced
China-UK talks. “What is more, we should
seize the opportunities when they come
along.”
广告
CKGSB Knowledge 2016
/ 43
Business Barometer

Profitable,
but Troubled Firms make money while facing issues

T
he CKGSB Business Conditions Index (BCI) registered 58.5
in October, a slight improvement on September’s overall in-
dex of 57.4. With this, the BCI has reversed the downward
trajectory which had been in evidence since May. For CKGSB’s
sample of relatively successful businesses operating in China, the
next six months are viewed with increased optimism. The CKGSB
BCI comprises four sub-indices. Of these, corporate sales fell slight-
ly from 75.4 to 74.0, while corporate profits rose from 57.4 to 61.8.
The fact that both of these indices are both well above the confi-
dence threshold of 50 shows that company prospects are improving.
The BCI, directed by Li Wei, Professor of Economics at the
Cheung Kong Graduate School of Business, asks respondents to
indicate whether their firm is more, the same, or less competitive
than the industry average (50), and from this we derive a sample
competitiveness index (see Industry Competitiveness Index). As
our sample firms are in a relatively strong competitive position
in their respective industries, the CKGSB BCI indices tend to be
higher than government and industry PMI indices.

The downward momentum of the BCI has been reversed

CKGSB Business Conditions Index
75

70

65
58.5
60

55

50

45

40
09-2011

03-2012

06-2012

09-2012

12-2012

03-2013

06-2013

09-2013

12-2013

03-2014

06-2014

09-2014

12-2014

03-2015

06-2015

09-2015

12-2015

03-2016

06-2016

09-2016

44 / CKGSB Knowledge 2016

 Winter 2016

Financing remains below 50… …while inventory fell below 50

60 Corporate Financing Environment 70 Inventory

50 48.4 60

40 50
48.8
30 40

20 30
09-2011
03-2012
06-2012
09-2012
12-2012
03-2013
06-2013
09-2013
12-2013
03-2014
06-2014
09-2014
12-2014
03-2015
06-2015
09-2015
12-2015
03-2016
06-2016
09-2016

09-2011
03-2012
06-2012
09-2012
12-2012
03-2013
06-2013
09-2013
12-2013
03-2014
06-2014
09-2014
12-2014
03-2015
06-2015
09-2015
12-2015
03-2016
06-2016
09-2016
The financing environment index rose in
Labor and overall costs remain high
October, from 47.5 to 48.4, but remains
100 Labor Costs Overall Costs below the confidence threshold of 50. We
95 can see that the financing environment for
90 the BCI sample is less than optimal, and
84 given that our sample consists mainly of
85
the leading powerhouses in the economy,
80 82.4 SMEs, this is a critical issue for economic
75 reforms going forward. The inventory in-
70 dex also fell this month, from 50.0 to 48.8,
hovering around the confidence threshold.
65
This too remains a significant issue for the
60
economy, with the index having registered
55 below the confidence threshold of 50 for
50 much of the past five years. The labor and
45 overall costs indices remained above 80,
with the former at 84.0 and the latter at
40
82.4, indicating that China’s cost prob-
09-2011
03-2012
06-2012
09-2012
12-2012
03-2013
06-2013
09-2013
12-2013
03-2014
06-2014
09-2014
12-2014
03-2015
06-2015
09-2015
12-2015
03-2016
06-2016
09-2016

lems are structural rather than cyclical.

Profits are rising on slightly falling sales

95
90 Corporate Sales
85
80 74
75
70
65
60
55 61.8
50
45
40
Corporate Profits
35
09-2011

03-2012

06-2012

09-2012

12-2012

03-2013

06-2013

09-2013

12-2013

03-2014

06-2014

09-2014

12-2014

03-2015

06-2015

09-2015

12-2015

03-2016

06-2016

09-2016

CKGSB Knowledge 2016

/ 45
China Insight

Searching for the Future

Baidu needs to find a better business model
By Shasha Chen

Image by Wei Bingnan

46 / CKGSB Knowledge 2016


Q
ian Zhu, a Chinese professional
who returned from New York in
2016, was surprised by how China’s
largest internet search company Baidu an-
swered one of her queries.
“When I searched ‘Rome, Italy’ on
Baidu Map to plan for my trip to Italy,
what I got were locations of Chinese wall-
paper manufacturers that named them-
selves ‘Rome’,” Zhu said. Having lived in
New York for 16 years, Zhu found one of
the challenges readapting to life in China
was dealing with the logic of a Chinese
search engine.
It is one of the milder criticisms Bai-
du has faced over the past year. In April,
the death of a college student named Wei
Zexi, who died after mistaking an adver-
tisement on Baidu for an experimental
cancer treatment for medically reliable
information, generated a nationwide out-
cry. Both the government and Chinese
users accused Baidu of failing to clearly
delineate paid advertisements from search
results. In July, after an official investiga-
tion over the scandal and the release of
tightened regulations on search advertise-
ments, Baidu reported its worst quarterly
earnings decline since it listed on Nasdaq
in 2005.
“The Zexi scandal caused Baidu to
cut its revenue expectation by RMB 2 bil-
lion per quarter since the second quarter
(of 2016), and the impact is expected to
last for a year,” says Connie Gu, an analyst
with BOCOM International.
The incident has put more pressure on
Baidu at a time when web search ad rev-
enues have already been shrinking, rais-
ing serious questions about the future of
the company, given its reliance on Internet
search for its existence.
“Baidu has been overly reliant on
search ads to generate revenues, which
was a realistic choice during its early de-
velopment,” says Wei Wuhui, a scholar of
media development at Shanghai Jiao Tong
University. “But now, such a sales model
appears to be insufficient.”
Baidu also faces fierce competition
from its two main domestic rivals in the
Internet space, Alibaba and Tencent,
which together with the search giant make
Baidu has
been overly
reliant on
search ads
to generate
revenues
Wei Wuhui
Scholar of Media Development
Shanghai Jiao Tong University
up the so-called “BAT” companies. Baidu
is also more constrained than the other
two companies that make up the acronym
in terms of expanding abroad, due to the
omnipresence elsewhere of Google.
Early Success
In fact, Baidu, established in 2000 in Bei-
jing’s Zhongguancun, China’s equivalent
of Silicon Valley, is often described as
China’s Google, which is true in terms of
web search. Robin Li, Baiduʼs CEO and
co-founder, grew up in a family of factory
workers in a town southwest of Beijing.
He is now Chinaʼs seventh-richest man
with a $12.6 billion fortune. In 2015, Bai-
du had more than 46,000 employees, and
reported a profit of $1.8 billion on $10.2
billion revenue.
Baidu operates a broad range of
products and services both via computer
browsers and mobile, including search,
advertising services, statistical tools, maps
and knowledge products, a package simi-
lar to Google’s core offerings.
Winter 2016
Early on, Baidu adopted a strategy to
aggressively penetrate the Chinese mar-
ket, which was greatly different from the
US market at the time in terms of maturity
and average age of users.
To expand the user base, Baidu initial-
ly took a surprisingly non-digital approach
by putting large numbers of sales people
on the ground. It actively partnered with
Internet cafés, popular among young peo-
ple, and set Baidu as their default search
engine. The company also launched prod-
ucts specifically aimed at young users.
In 2002 and 2003, Baidu launched MP3
downloading and Tieba, an online mes-
sage board community, both of which
rapidly became popular. By the time of its
2005 IPO, about a quarter of Baidu’s traf-
fic came from its MP3 search.
Although internet users were already
using the American company’s services,
Google officially opened in China also in
2005, but targeted educated users in big
cities who appreciated its professional
email services as opposed to Baidu’s fun-
based chat rooms.
According to iResearch, Baidu passed
Google in number of visitors in 2004 and
has been in the lead domestically ever
since. Baidu in 2004 acquired hao123.com,
a directory for first-time internet users,
which was followed by Google’s similar
acquisition in 2008 of 265.com. It was not
until 2009 that Google launched a music
streaming service in China, which proved
far too late to be effective.
But Baidu’s victory over Google was
also built on its smart interaction with the
Chinese government, particularly in the
realm of censorship, by deleting certain
sensitive search results. Google was effec-
tively blocked from the China market in
January 2010 when it declined to continue
filtering search results in accordance with
official requirements.
Given the realities of China’s regula-
tory environment, Google has yet to stage
a comeback. In 2009, Baidu had 63% of
China’s search revenue versus 33% for
Google, according to iResearch. Last year,
its share of the market by revenue was
80%, with Google still holding 9.2%.
“Baidu’s early success was no surprise,
CKGSB Knowledge 2016
/ 47
China Insight
as China’s regulatory environment offered
the company an advantageous position
over its global counterpart,” says Wei.
“In the meantime, Baidu demonstrated a
quicker reaction and better understanding
of Chinese people’s tastes than Google.”
But Baidu’s triumph has been coupled
with criticism. The MP3 service, for in-
stance, has been widely accused of rely-
ing upon pirated music, although such
problems have by no means been limited
to China. There have also been several
scandals surrounding search results. In
2008, news reports claimed that Baidu
took payments in return for deleting nega-
tive news on Sanlu Group, a diary product
company that sold milk powder containing
melamine, a plastic ingredient, which led
the deaths of six children. Baidu denied
the reports. And this November, Baidu’s
youngest and most promising VP, Li Min-
gyuan, agreed to quit from Baidu after be-
ing accused of engaging in “huge econom-
ic dealings” involving acquisitions.
Publicly, much criticism has continued
to focus on Baidu’s business ethics, espe-
cially in contrast to Google’s, whose cor-
porate motto is famously “Don’t be evil.”
After the Wei Zexi scandal, easily Baidu’s
most damaging, Robin Li himself openly
commented on the difference, contrasting
While Baidu’s asset have grown in recent years, its profit margins have shrunk
Baidu Operating Profit Margin
(Quarterly)
Source: YCharts; Tranding Economics
48 / CKGSB Knowledge 2016
Google’s idealism with Baidu’s pragma-
tism. He said Baidu perhaps needs to be
a bit more idealistic in the future to win
people’s hearts.
On the other hand, some Chinese ana-
lysts believe Baidu’s pragmatic philoso-
phy is a norm among Chinese privately
owned companies, a product of dealing
with China’s unpredictable regulatory en-
vironment.
“As many other Chinese private-
owned enterprises, Baidu understands it
has to make quick money and grow bigger
in the short term in order to play a power
game with the authorities,” says Wei.
“The operational risks for small compa-
nies can be more unpredictable, but big-
ger Chinese companies have the power of
access to cleverly navigate the regulatory
uncertainties.”
However, with changing user habits
and the growth of other domestic Internet
companies such as Tencent and Alibaba,
which were mentioned by Baidu in its
2015 financial report as key competitors,
the company is now facing new challenges
beyond the search industry.
Baidu’s profit in the second quarter of
2016 was RMB 2.87 billion ($431 mil-
lion), one fifth of that of Tencent’s profit
and one third of Alibaba’s. The gap in-
Outgrowing the Profit
dicated that Baidu’s membership in the
country’s powerful BAT group looks in-
creasingly in jeopardy. And this struggle,
too, may be wrapped up with the govern-
ment and regulations.
“The harsh reaction from Chinese gov-
ernment after the Wei Zexi scandal can be
another sign indicating Baidu is losing its
position as a powerful Internet company,”
says Wei.“With the increasing popularity
of Tencent and Alibaba, authorities do not
need Baidu as much as it used to.”
Time is running short for Baidu to find
a new strategy and new revenue sources,
he adds.
Baidu’s Diversification
Despite massive changes in the hi-tech and
media space, online ads remain Baidu’s
main revenue source, accounting for 97%
of the total in 2015. With the increased
competition and the downward pressure
on online advertising rates, it is crucial for
Baidu to diversify its business.
In 2015, Baidu made 23 investments
totaling US $1.1 billion in value, with
the largest category by number being out-
side of its core business in Online to Of-
fline (O2O) services (52%), followed by
e-commerce (13%), according to research
by BNP Paribas.
Baidu Total Assets
(Quarterly)

But Baidu is conservative in terms of
investments and partnerships in compari-
son with Alibaba and Tencent, whose in-
vestments last year totaled US $11 billion
and US $3.8 billion respectively.
In the Online to Offline (O2O) sec-
tor, Tencent-backed Dianping and Alib-
aba-backed Meituan, both group buying
platforms, merged in 2015, giving the
newly-formed platform almost 80% mar-
ket share, and putting great pressure on the
Baidu-backed Nuomi. Meituan-Dianping
raised $3.3 billion in early 2016, com-
pared to Nuomi’s $169 million ($25.3
million) investment from Baidu. Last year,
Tencent-backed Didi Dache and Alibaba-
backed Kuaidi Dache also merged to form
China’s largest taxi hailing app, adding
competition to the Baidu-backed Uber
China in the cut-throat online car hailing
segment. Uber China finally threw in the
towel in August and sold out to Didi.
Generally speaking, analysts believe
Baidu’s strategic moves in developing
new services has been weaker than its
competitors.
“Baidu has lagged its large-cap Chi-
nese internet peers in delivering new com-
mercial innovations,” says Vey-Sern Ling,
analyst at BNP Paribas.
According to him, a number of strate-
gic innovations and acquisitions in the past
few years have given Tencent a strong po-
sition in entertainment, O2O and finance,
while Alibaba has also created a value far
beyond e-commerce.
“The latter has demonstrated success-
ful organic innovation, such as AliCloud
and Ant Financial, and made a large num-
ber of strategic investments in logistics,
digital entertainment and healthcare,” says
Ling. “In comparison, Alibaba has the
strongest capacity for further investments
and acquisitions among the three. Baidu is
the weakest.”
iResearch suggests Baidu is particu-
larly weak in the online finance sector.
Baidu Wallet, its online payment tool
accounted for only 0.5% market share in
China’s online transaction market in 2015.
Alibaba’s Alipay dominated with 68.4%
of market, followed by Tencent’s Tenpay
with 20.6%. In the mobile payment sector,
Baidu has lagged
its large-cap
Chinese internet
peers in
delivering
new commercial
innovations
Vey-Sern Ling
Analyst
BNP Paribas
Tencent is rapidly developing a user base
for its payment system through the social-
networking tool Wechat, which has 700
million active users each month. Ironi-
cally, Baidu’s O2O platforms, such as its
eye-catching food delivery service Baidu
Waimai, link with Tencent’s WeChat
platform for transactions, although using
Baidu Wallet nets a small discount.
But Robin Li expects Baidu’s O2O
services to have revenues far exceeding
those of search in the future, given the
huge market potential in the sector. But
not all third-party observers are so bullish.
Vey-Sern pointed out that with high com-
petitions in the sector, higher expenses and
uncertain returns are expected.
Similarly, Zhou Xiaoqian, an analyst
with iResearch said the increasing cost
of logistics and human resources might
narrow down the profit of O2O opera-
tors in the coming years. The similarity of
Winter 2016
services by different operators is another
problem.
“We see in the past [few] years that the
tremendous growth of O2O users is large-
ly built on operators offering subsidies to
motivate users rather than innovation,”
Zhou says. “In the future, improvement of
technology must be the key for success.”
But in fact, that is likely the compa-
ny’s strongest card. Baidu’s investment
in developing artificial intelligence (AI)
services is believed to be a strategic move
aiming for the future rather than quick re-
turns. All the analysts interviewed took a
positive view on Baidu’s AI technology,
which is expected to be integrated with
services including search, O2O and auto-
mated vehicles.
“With the slowdown in the growth
of the number of Internet users and the
increase in labour costs, AI can help to
cut down human resources spending to
improve efficiency,” says Connie Gu of
BOCOM. “In the AI sector, Baidu is a
frontrunner and it has advantages in data
gathering.”
Baidu’s AI lab was established in 2013,
making it the first-mover in developing AI
in China, and it is a cutting-edge developer
in the world market. In 2014, Baidu hired
Andrew Ng, formerly the head of Google
Brain and leading AI expert, to lead its AI
team. By 2015, Baidu built Baidu Brain,
which is one of the largest computing neu-
ral networks in the world. Leveraging this
resource, Baidu in September announced
the establishment of a $200 million ven-
ture-capital unit that will focus on early-
stage AI and virtual reality (VR) projects.
BNP Paribas indicated that Baidu’s
current innovation is expected to support
a strong capacity in deep learning, high
performance computing, voice and image
recognition, natural language processing,
big data, and human-computer interaction
in the future. “The early investment to-
gether with Baiduʼs access to Chinese lan-
guage search data provides it with a strong
head start in the commercialization of AI,”
BNP Paribas wrote in a report.
Attempts towards that commercializa-
tion of AI have already started. In 2015,
Baidu launched a Siri-like AI service
CKGSB Knowledge 2016
/ 49
China Insight
named Duer, which has been integrated
with Baidu’s O2O platforms including
Nuomi, allowing users to get AI assis-
tance in everything from healthcare to
travel planning. It has also announced in-
tended public use of autonomous vehicles
on fixed routes in select cities in China by
2018, and mass production of driverless
cars by 2021. Despite some uncertainty
in the business model for autonomous ve-
hicles, Vey-Sern Ling believes the market
potential is huge.
“Our conservative projection suggests
that the successful commercialization of
autonomous driving alone could increase
Baidu’s revenues by over 30%,” Ling
says. However, Baidu’s plans hit a snag
in November, when BMW ended its self-
driving cars partnership with the compa-
ny. Baidu is searching for a replacement.
Globally, China and the US are the
two leaders on AI, and both countries have
spent tremendous amounts on AI devel-
opment. The US government in 2015 an-
nounced a $1.1 billion investment in AI-
related research for both innovation and
security reason. That same year, Robin Li
proposed the development of a national-
level artificial intelligence program in
which he said private companies would
partner with science research institutes
and Chinaʼs national defense and military
organs on AI development. According to
Wei Wuhui, Baidu’s strategically devel-
opment of AI might enhance its position
in China to continue bargaining for a fa-
vorable regulatory environment.
Going International
But Baidu still has ambitions outside China.
In 2015, 94.6% of visits to Baidu’s search
engine originated from China. The US,
its second-largest market, accounted for a
mere 1.6%, according to Statista, a statistics
website. But Robin Li has said he expects
Baidu to become a household name in 50%
of world’s markets by 2020.
Achieving this will not be easy. Glob-
ally, Google is overwhelmingly dominant
and highly effective. With only 25% more
employees than Baidu, Google gener-
ated seven times more revenues than the
Chinese company in 2015. In the mobile
50 / CKGSB Knowledge 2016
In the AI
sector, Baidu
is a frontrunner
and it has
advantages in
data gathering
Connie Gu
Analyst
BOCOM International
sector in particular, Google’s Android
operating system is the predominant OS
globally. With an absence of a competi-
tive mobile system, Baidu’s O2O apps are
based on Google’s Android platform.
Baidu’s attempts at internationaliza-
tion have not gone well. Its earliest expan-
sion was in Japan, where it launched its
search service in 2007. Japan was chosen
because of cultural similarities to China,
particular the use of Chinese characters.
But Baidu did not prosper in Japan as it
had expected. Eight years later, the com-
pany announced the closure of its search
engine in Japan due to declining user num-
bers.
To avoid similar failures, Baidu has
adopted a different strategy for its latest
round of international expansion. Accord-
ing to Baidu’s president Zhang Yaqin, the
company will target Southeast Asia, South
America and the Arabic-speaking world as
preferred regions, which have large popu-
lations and are seen as ripe for mobile In-
ternet development.
Baidu’s expansion rate is now faster
than its earlier days, which highlights its
growing ambitions. In Indonesia, Baidu
branded itself as a ‘mobile first’ company
and is aggressively promoting MoboMar-
ket, its app-based O2O service. Mobo-
Market’s monthly active users increased
from 2.9 million in 2014 to 4 million
in 2015. Baidu Map, similar to Google
Maps and Apple Maps, is set to enter into
more than 150 countries and regions all
over the world by the end of 2016, and
aims to have 50% of users from overseas
by 2020.
In Brazil, Baidu’s launch ceremony for
its Portuguese search engine was attended
by China’s president Xi Jinping, a strong
sign of government support. But such sup-
port, while offering Baidu an advantage
domestically, could in some cases be detri-
mental elsewhere. Baidu is expected to be
preparing for political challenges in inter-
national markets, especially in countries
with geopolitical differences with China.
In 2013, Tencent’s WeChat was targeted
for a boycott in Vietnam due to a political
dispute with China.
But the ultimate challenge may come
from Baidu’s innovation capacity and
credibility, which had affected its perfor-
mance in China.
When asked to comment on Baidu’s
international services, returnee Qian Zhu,
said, “I’m forced to use Baidu in China
because Google is blocked. But outside
China, I vote for Google for professional
search and mapping services.”
Chinese analysts also highlighted that
there are lots of areas Baidu needs to im-
prove to compete on a global basis. The
future of Baidu will increasingly depend
on whether Chinese and overseas consum-
ers accept the innovations it offers. Mean-
while, there are still improvements to be
made to the core services.
“Taking map as an example, the accu-
racy of the service should be enhanced,”
Zhang Xu said.
Needless to say, the future of Baidu
will be increasingly based on whether Chi-
nese and overseas consumers would be
impressed by its new innovations and en-
hanced credibility.
 Conversations
“You want to make sure you have
a win-win formula. When we build
a theme park we build it forever,
we are here forever, and we are
going to continue to grow” 52
Philippe Gas
General Manager,
Shanghai Disney Resort

“If the product does not fully meet

customer needs, the price cannot

56
correct that mistake, and the product
ends up as a flop”
Georg Tacke
CEO, Simon-Kucher & Partners

“China’s economy [is] a lot bigger, but it’s

got a lot more problems and a lot more
debt and so it is a bit harder to be as
optimistic as people were back in ‘04”
59
Bill Bishop
Co-founder of MarketWatch,
author of Sinocism newsletter

“In today’s environment, access to the

right human capital, the right talent,

62 has become a very important source of

competitive advantage for organizations”
Edward E. Lawler III
Distinguished Professor,
Marshall School of Business

“There needs to be more serious

conversations with China about what the
nature of the global system ought to be
looking like in a go-forward basis”
65
Larry Summers
Former US Secretary of the Treasury
C-Suite

Behind the Scenes in the

Magic Kingdom
Philippe Gas, General Manager of the Shanghai Disney Resort,
discusses the challenges of building the park and Disney’s partnership
with the Chinese government
By Tom Nunlist

T
he opening of the Shanghai Disney
Resort on June 16 this year was argu-
ably the biggest event in the history of
The Walt Disney Company since the first
Disneyland opened in California in 1955.
The culmination of decades of negotia-
tion, planning and construction undertaken
together by Disney and the Chinese gov-
ernment, as well as an investment of $5.5
billion, the park has already received an
overwhelmingly positive reception from
the public. But according to Philippe Gas,
General Manager of the resort, this is just
the beginning.
Starting out in a financial role, Gas has
been with The Walt Disney Company for
25 years. He has worked on every continent
where the company has a presence, making
him among the most well-travelled of com-
pany executives. Before being assigned
to the Shanghai park, he served for seven
years as the CEO of EuroDisney. In this
interview, he gives a detailed, inside look
at the long process of developing the park
with the Chinese government, the unique
localization that Disney built into the resort
and the overall mission to bring happiness
to guests.
Q: Planning of the Shanghai Disney Resort
goes way back, 15 or 20 years. How was
the concept developed?
A: It goes back a long time, to the early

52 / CKGSB Knowledge 2016


1990s, and the government of Shanghai
at the time. Former Premier Zhu Rongji,
who was Mayor of Shanghai from 1987 to
1991, was the one who had the idea to bring
Disney to Shanghai. That’s how far it goes
back when it comes to the theme park proj-
ect. And then it was Bob Iger, Chairman
and CEO of The Walt Disney Company,
who was instrumental in his support behind
the development of China for the Walt Dis-
ney Company. He arrived as President and
COO of Disney in 2000, and he took back
this project and really started to engage,
actually with Premier Zhu Rongji, to push
the agenda forward. That more formal ne-
gotiation took us all the way to 2011 and
the groundbreaking of Shanghai Disney. It
is a long history, but I think it came from
both parties—Iger being completely certain
of the potential of China for The Walt Dis-
ney Company, and the Chinese government
also very interested already by the push of
the new economy and tourism and thinking
about Disney as one of the key drivers, sim-
ply because of who we are.
Q: Why did development of the project take
so long? Is that a typical timeline?
A: I don’t think we could have expected
it to be 10 years or 20 years, but you want
to make sure you have a win-win formula.
When we build a theme park we build it
forever, we are here forever, and we are
going to continue to grow. So you want to
make sure you have the right level of con-
fidence that what you do is set for that. We
come with ambition, we come with pride,
we come with a certain view of what we
can bring to this market, but also we want to
make sure we have all the elements in our
hands. We also respect the fact that we are
in China, we respect the rules of the game,
and the interest of the Chinese parties, our
partners. I wasn’t there at the time, so I
don’t know what they thought in terms of
timing, but it was worth the wait when you
think about what we have built, and the size
of the investment.
But we also didn’t waste the time, be-
cause at the same time we were negotiat-
ing, we were taking lessons from the other
sites. It is part of a journey of development,
understanding what to do to succeed in dif-
We thought
[China] was a
great opportunity
to do something
we have never
done
ferent contexts and different markets. So
we have taken all that to make this product.
Once again, we knew it would be long. I
don’t think we knew it would be quite that
long, but it was worth it.
Q: How did Disney coordinate with the
various stakeholders, specifically the Chi-
nese government, which is a major part of
the partnership?
A: It’s a bit different in China than in
France, my home culture. First of all, you
have to come in with the attitude of know-
ing that there are many things you don’t
know. This is where the partner becomes
essential, a partner that you trust, a partner
that trusts you, because you are going to use
that partner, in this case the Shanghai local
government, and the central government as
well, as a guide, as an advisor, as people
you can go to and talk about issues. And
that has been a key dimension of the proj-
ect. We would not be successful, we would
not be where we are without them, because
of years of working together, of getting to
know each other better, understanding how
we contribute to their success, and how
they contribute to our success.
And it is like any partnership: not ev-
erything is perfect. Sometimes you have
a private business agenda that is not com-
pletely aligned with the public, political
agenda. That happens in France, that hap-
Winter 2016
pens in Hong Kong, that happens any-
where. It’s ok, as long as you have the same
overall objective, you get to find the solu-
tion, you get to find the right compromise,
and by knowing each other, we have been
better able to put ourselves in the partner’s
shoes. We have also been careful to not
get stuck on the main agreement, the legal
document that outlines the responsibilities
of each side. This is a piece of paper, right,
but what I am going to be aware of is that
we are entering into a long-term partnership
and we need to make this paper come alive.
It is not just about the letter, it is about the
spirit, and applying every day the spirit of
trust, of partnership. So even if the docu-
ment says, you, Disney, on that matter de-
cide, I will still take advice. The product we
build will be better if we work it out with
our partner. And that’s an essential part of
our success.
And the number-one thing of defining
the relationship with the Chinese partner is
understanding what China is building, what
China is developing with the tourism indus-
try and the growing service sector, and that
we can play a role to help grow this indus-
try in the country. One of most exhilarat-
ing missions that the CEO, Iger, gave me
was to think of this as not only building the
business, but also helping the country raise
its level. And we take that very seriously.
It is as important as simply making Shang-
hai Disney successful; it is about our role
within this overall Chinese agenda, which
I think is great.
Q: China obviously changed a lot while the
resort was being developed. To what extent
did the concept change with the country?
A: The big change of China in the past 20
years is the growth of the middle class, and
the fact that China is getting richer, and
there is more ability for people to spend on
leisure and quality of life. That plays right
into our arrival and the timing.
I think the way to think of it that we are
here to do something that goes completely
through time, which is we bring happiness.
We are here with a simple mission: allow
families or friends to spend a moment to-
gether, in an environment that will allow
them to get away from their day-to-day life,
CKGSB Knowledge 2016
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C-Suite
and create a memory that will last with
them. That’s what we do. It’s very intan-
gible, but that’s what we are here for. And
that is done by creating an immersive envi-
ronment, an excellence of service that goes
beyond what you would expect, being able
to make one person feel special when ac-
tually we have 60,000 people in the resort,
and every single guest has to feel recogni-
tion of who they are. That’s why we are
here, that’s what people know about us and
expect from us. With that regard, nothing
has really changed when it comes to our
philosophy and our mission in China, be-
cause that goes across borders, across coun-
tries and through time.
Q: This resort is the not Disney’s first expe-
rience in mainland China, right? When did
Disney the brand first come here?
A: Actually the story of China and Disney
started in the 1920s, and in the 1930s with
the princesses and the classic Disney char-
acters being what kids and families were
exposed to first. Snow White premiered
in Shanghai in 1938, and one of the most
popular and well-known princesses today
is Snow White. The success of the Snow
White adventure we have at the park shows
it. People want to relive the story of some-
thing their grandparents told them about.
So really we have a long-standing relation-
ship with China.
And now we are bringing in very new
characters, very new stories, Marvel and
Star Wars are coming into this market.
Marvel is hugely popular here in China,
all the Marvel movies, the newly-released
Doctor Strange, are blockbusters. They are
something we are going to leverage, and
find and live those adventures here in our
park. Star Wars is a story that we will create
in the Chinese market, but it will grow with
the expansion of the movies and franchise
in the future. Zootopia is a great example
of a very new movie that was an amazing
success in China.
So you have these kinds of classic
1920s characters, Snow White and Mickey
Mouse and friends, and then you have these
brand new cool stories that are also hits. So
we have the full spectrum of stories and
characters that we are working with that
54 / CKGSB Knowledge 2016
Shanghai Disney Resort in the evening
will allow Chinese families and Chinese
kids to come and meet at Shanghai Disney
resort. It’s a long story, but there is a lot of
opportunity to create a stronger connection
with the consumers today.
Q: Creating that connection has obviously
been successful, but what are some of the
challenges in connecting with consumers in
China?
A: First, the biggest challenge is to know
what the consumers’ expectations are, and
then be true to those expectations. Today
Disney in China means excellence. How
you define excellence is your choice, but it
means something quite big. So when you
come into the Shanghai Disney Resort, you
expect from the moment we open, excel-
lence, excellent service, excellency of the
immersions in the stories, excellence in
everything we do. And that has been our
biggest objective and our biggest challenge.
We have a brand new park, with brand
new technology, with brand new themes,
brand new stories with brand new cast
members. There are 10,000 cast members
and employees who come from all over
China, and they create the environment for
our guests, from the moment they arrive. It
is difficult for people to measure how hard
that is.
And when it comes to purely how we
define our job, it is staying relevant. A piece
advice I need to give to any company that
comes with a strong culture is that company
culture is as good as its ability to find a bal-
ance, and be relevant to the expectations
of the people. And so one of the things we
have tried to do here is to bring things that
are not necessarily Disney, but that guests
expect to find. Food is a good example.
People in China like to eat Chinese food,
and we developed a menu throughout the
park that is maybe the most diverse menu
we have ever developed for any Disney,
with 80% of the food representing the eight
cuisines of China, and also representing the
traditions of Indonesian, Malaysian and
Thai food. Actually we only have one place
where we serve burgers.
Q: That touches on localization—can you
get into more details about how you crafted
an experience that is truly Disney and also
truly China?
A: China is an amazingly buzzing place,
with a lot of ability from the people of Chi-
na to embrace changes, and to embrace new
things, and we thought it was a great oppor-
tunity to do something we have never done
before. We just allowed ourselves to think
differently. For example, in every Disney
park you have a main street, but we don’t
have main street here. We felt it was a very
Midwestern America concept from the turn
of the 20th century, and not something that
was the most compelling or relevant to Chi-
nese consumers.
So what we have here is Mickey Av-
enue, with beloved Disney friends welcom-
ing our guests at their entry into the park.
This is because people come to Disney for

Disney, whether you are in Shanghai, in
Hong Kong, or Tokyo. They want to see the
Castle, they want stories they can recognize,
and they want to see their favorite character.
So we have people see things they know
when they come into the park, and have
them say “I know where I am.” It’s like if
you go to Sydney harbor and you see the
Sydney Opera House, you know where you
are in the world, you don’t have to guess.
You say “I am here, I have arrived.” That’s
the same thing we tried to apply here.
But there are some elements that are
important to me as my culture tells me,
food is one. Language is one. And it is not
just saying every sign has a version in Chi-
nese, that’s something we do everywhere.
If you go to see our shows, take the stunt
show, the pirate show, this show was devel-
oped in Mandarin. The story, the dialogues,
everything was developed by local Chinese
writers for a Chinese audience, not as we
do it usually in English and then translate in
Japanese or French. No, we have done this
with the consumer in mind, so the stories,
the jokes, the humor is actually relevant
to you because it is your culture talking to
you, it is not us trying to look like Chinese.
The architecture has changed some as
well. Some elements, like the Castle, re-
mind people of where they are, but we sub-
tly recognize that we are in China at Shang-
hai Disney. The highest finial of the castle
has the Peony flower, the national flower
of China. The architecture of Disney town
is done in Shikumen style that once again
reflects the culture of China. Those are ele-
ments that people can appreciate. And with
those elements we have tried to express our
pride to be in Shanghai, to be hosted and
welcomed by the country.
Q: Being a Western brand, do you think
Chinese people then see the magic kingdom
as something “Western,” or is it a place
that is fantastical and beyond that kind of
distinction?
A: I don’t think they think about it terms
of Western and Chinese. I think they think
about Disney as Disney, and the stories
and characters. Our values go across bor-
ders: kindness, family, friendship, those
are values that are very important in China,
all those values go across borders. And
you can oppose Western versus Eastern,
but when it comes to Disney people tend
to have a truce, and those values that are
communicated, for most of us, if you are an
eight year old child, or an old man like me,
a lot of our memories start with a Disney
story, and so it brings the child back into
who you are. And I see that even now in my
life. I meet very senior executives, or very
serious businesspeople, who turn into kids
when they realize I am working for Disney.
And why? Because it brings the kid back
in you. Either because you are a granddad,
and your grandchild now is playing with a
Disney toy, or because of yourself. Maybe
your dad took you to see a Disney movie.
That kind of thing goes beyond borders.
Q: The park has been open for a few months
now. How is it going so far?
A: It has been an amazing first few months.
But I’ll repeat what I said before: We are
here forever. So we are not here to think
just about the first few months. Speed is
not an object, we want to do things right.
This is a new market for us, a market that
knows our name, knows a few things about
us. And we have one opportunity to make
the first good impression, which is critical.
And let me tell you this is the most bal-
anced opening I have seen, and I have been
exposed to three, Disneyland Paris, Hong
Kong and Shanghai. This one is amazing,
and not only because of the popular suc-
cess, we welcomed four million guests in
our first four months of operation, which in-
cluded the peak summer season, and that’s
just an amazing reflection of the demand.
We have also achieved a fantastic balance
when it comes to communication, the recep-
tion of the local market, from all the stake
holders, from the guests, the public parties,
the press, everyone has been so supportive
of the arrival. We feel we are already part
of the environment, which is something
very important to us. We want people to
recognize we are here, and we want to be
a citizen of Shanghai, and we have been,
right from the opening day. It is amazing to
see the reaction of the guests to what we of-
fer them. They love our rides, they love the
shows, they spend the maximum amount of
Winter 2016
time in the property to see everything. We
are very happy with the opening.
Q: Right now is a high-growth period for
theme parks in general in China, with ven-
ues opening all across the country. What do
you think of the competition?
A: I don’t let myself get bothered by things
that I don’t control. But I think we help the
competition by helping to raise the stan-
dards, and raise the level of entertainment.
Because when you have a great experience,
you want to have more. Meaning if you
have a great experience in a park near me,
you will want to come to have a great time
at Disney. And if you have a great time at
Disney, you will want to have a great time
somewhere else. And so quality feeds suc-
cess, and that to me I would say comes
back to our mission in China, which is to
help raise the standards. I think we came
at the right time, because clearly tourism
is growing in the country, and that’s great.
And second we can help bring more qual-
ity entertainment, more quality tourism to
China and that is the way I am looking at
it. Every day I am thinking of how we can
be better at what we do, that’s what really
matters to me.
I don’t control what the competition
does, but I hope they do great, because it
will help us. But we don’t let ourselves be
bothered by any of it, because we are here
to do the best for our guests.
Q: You mentioned that Disney is here for-
ever—can you give us any inkling about
future plans?
A: It is definitely just the beginning, and we
just recently announced we’re already ex-
panding our park with the addition of Toy
Story Land. We are here to stay and grow,
and we are convinced of the long-term suc-
cess. But it is a bit early to talk about plans
for the future, because we are focused on
making this park a success, we’ve been
open not even five months. It would be very
presumptuous to tell you about the next
phase. We need to make sure we have a sta-
bilized operation, and that we have a mo-
mentum that continues to build. So my fo-
cus is on this first phase, but we definitely
have a high ambition.
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Q&A
Innovation the Smart Way
Georg Tacke, CEO of Simon-Kucher & Partners, discusses common
pitfalls in product innovation and how to avoid them
I
n our increasingly fast-paced world,
there is no room for companies to be
complacent. To survive in the com-
petitive marketplace long term, constant
product innovation is a basic necessity.
However, nearly three-quarters of new
products either fall far short of their tar-
gets, or fail entirely. Not only that, busi-
nesses have become tolerant of this high
failure rate to the point where it is treated
as a given risk.
Dr. Georg Tacke, CEO of the global
management and consulting firm, Simon-
Kucher & Partners, emphatically dis-
agrees with this presumption. According
to Tacke, failing to make a product finan-
56 / CKGSB Knowledge 2016
By John Christian
cially successful is very often the result of
a homegrown issue—rather basic flaws in
the process, from the initial design to end
marketing. In his new book, Monetizing
Innovation, co-written with his colleague
Madhavan Ramanujam, he explains the
traps many companies fall into when cre-
ating new products, offering refreshingly
commonsense principles to avoid them.
To him, it is all about “designing the prod-
uct around the price.”
Q: In the beginning of the book, you point
out and criticize the fact that a high rate
of financial failure for products and inno-
vations—72% to be accurate—is deemed
acceptable. Where does this attitude of in-
evitable failure come from?
A: Yes, and in Asia it is 76%.
This is a difficult question, there is not
one single answer. A little bit comes from
the Silicon Valley attitude of VC-based
businesses, which are very much about
statistics. The assumption is that if I invest
in many companies, thereʼs a higher prob-
ability of investing in a unicorn, a busi-
ness valued above $1 billion. But thereʼs
a major flaw in this attitude, because it
assumes the probability of success is in-
dependent from the probability of failure,
and that success is a given. In our view,
that couldnʼt be more incorrect.

We are already seeing a slight change
in attitude. Back to the VCs for instance,
investors are starting to see that their job
goes beyond financial investment, and
theyʼre going more into the businesses,
trying to do turnarounds and take more of
an influential role than five or seven years
ago.
On the US West Coast, I also see the
development that the pure growth orien-
tation, which ignores profit or revenue,
is gradually vanishing. We have lots of
projects where people don’t ask us “how
can I grow volume,” but rather “how can I
grow revenue and how can I become prof-
itable?” This means the traditional way
of looking at businesses is experiencing a
comeback.
Q: Can you tell me about a product that
you consider one of these unnecessary
failures?
A: Take for instance Amazonʼs Fire
Phone. Amazon wanted to attack Appleʼs
iPhone and put every feature you can think
of into the phone. That included, among
others, a 3D-display, which needed sev-
eral cameras to generate the 3D effect.
The cameras used a lot of energy, which
significantly reduced battery life.
The Fire Phone was a disaster. Already
after a few weeks it was given away with
a cell phone contract for just $1; Amazon
had to write off $170 million on the Fire
Phone inventory. But this disaster could
have been avoided. Amazon could have
asked the customers about how important
certain features are to them. They would
have found out well in advance that smart-
phone users donʼt care about a 3D effect
and several other Fire Phone features. Am-
azon surely wouldn’t have started the Fire
Phone adventure, or they would have at
least designed the product to be complete-
ly different. But Jeff Bezos did none of
that; he built it, tried to sell it, and failed.
Another example is the Segway. If
you look at the initial numbers it is a super
flop. But if the developers had started talk-
ing to customers in advance, they would
have found out that the price they needed
to cover the costs was far too high to make
a mass product. Accordingly, they would
Amazon had to
write off $170m
on the Fire
Phone inventory.
But this disaster
could have been
avoided
have either come up with cheaper and sim-
pler technology, achieving a price point to
make it a mass product, or they would have
recognized it works well with a segmented
approach, for example, for security work-
ers in a shopping mall, or tourists. They
then could have designed it specifically for
these segments. But they did none of that,
and so it failed in its original positioning.
Failure is also possible on the other
side of the coin. The Asus Mini EEE PC,
introduced in 2007, was the first mini
notebook when it was released. Many
people would call it a success: it was com-
pletely sold out, and after three or four
months on the market the CEO said they
were unable to produce more than 10% of
their current demand. To my mind that is a
failure. Could they have done better? Yes.
They could have found that out earlier on,
and either gone higher with the price or in-
creased production capacity.
Q: So this is building the product around
the price. Can you explain more about
how it differs from just picking the opti-
mum price?
A: If the task is to pick the optimal price,
you first have the final product and then
you determine the price. In the way we
Winter 2016
describe it in the book, and the way we
recommend, you start early on, right at the
beginning of the innovation process when
you don’t yet have the product. You have
what we call the “willingness to pay” talk
and you find out which features are im-
portant and which are less so. With this
information you design a product with an
optimal value-cost-price ratio. In the other
scenario, without using the information
on willingness to pay, you simply hope to
design the right product and then you try
to find out what the best price is. But if
the product does not fully meet customer
needs, the price cannot correct that mis-
take, and the product ends up as a flop.
To give you an example, if you do
it our way, you would perhaps find out
that an SUV does not necessarily need a
four-wheel drive, because people use their
SUVs to drive along city streets. They just
want a bigger car. Your analysis shows
that half of these drivers donʼt want a
four-wheel drive, and the other half do.
You then have to make the decision: Do
I integrate the four-wheel drive feature
into the product, or do I leave it out? You
maybe decide that it wonʼt be included in
your base version. That reduces costs and
gives you the opportunity to offer a lower
price tag, leaving the customer to choose
whether they opt for a four-wheel drive.
Without having made that analysis,
you most likely would have put everything
into the product. It would have been fully
loaded and a big segment of drivers would
have perceived it as too expensive. In the
end you would have ended up with lower
volume.
Q: That is one of the big lessons in the
book: Ask the target customer what they
are willing to pay for, which is a very sim-
ple principle. What flawed thinking causes
companies to skip that basic question?
A: It is so easy, right?
I think it is a combination of three
things. First, what we see in many compa-
nies is laziness. They have always done it
that way, they don’t think about it, and they
leave the innovation process unchanged.
The second is a conscious decision, to do
things without analyzing the willingness to
CKGSB Knowledge 2016
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Q&A
pay. The principle is: trust the engineers,
they know what they are doing, they will
come up with the right thing and let’s not
disturb them in the innovation process. All
the other things, like pricing, customer seg-
ments, positioning etc. are afterthoughts
and will come later. Several companies
have that as a conscious principle.
And the third thing is: companies be-
lieve that it cannot be done, that the cus-
tomer has no idea what he or she wants,
that there are no reliable methods to find
out the willingness to pay before the prod-
uct is ready. That’s incorrect. You can
describe things to potential customers
and they are able to state their preferences
and willingness to pay. And nowadays we
have excellent methods for every prod-
uct and situation imaginable to measure
customersʼ willingness to pay in a precise
and reliable way.
It’s a combination of these three ways
of thinking.
Q: You also mention flawed demograph-
ics, for example the point that, techni-
cally speaking, Ozzy Osbourne and Prince
Charles belong to the same group. In Chi-
na the buzzword is the middle class, which
is extremely diverse. What is behind this
flaw?
A: If you do segmentation based on so-
cio-demographics such as age, status, in-
come, region, etc., you end up with Prince
Charles and Ozzy Osbourne being in the
same segment. This is of course nonsense,
but is a good illustration of the classical
segmentation deficit. For new product de-
velopment, segmentation should always
be needs or value-based, that is to say ho-
mogenous groups with the same or similar
needs. In this sense, the middle class you
mentioned is not a precise enough seg-
mentation for product innovation. It is too
broad, fuzzy and not needs-based. Prod-
ucts aiming at such an unspecified large
group will most likely end up as average
products, which don’t really fit anybody.
Q: Yes, and there is yet another distinction
you also make here, between features and
values. Is this a branding issue?
A: It is a product communication issue
58 / CKGSB Knowledge 2016
Companies
believe that
it cannot be
done, that the
customer has
no idea what he
or she wants...
That’s incorrect
rather than a branding issue. Product com-
munication often focuses on technical fea-
tures, in telecommunications for example
it could be megabits per second, LTE, etc.
The value of these technical features is that
you can download a 90 minute movie in X
minutes, which is much more meaningful
than the technical specification, which is
often not understood by the customer. We
observe that for this reason a lot of prod-
ucts flop. To fix that, we recommend to
involve marketers early on in the innova-
tion process, so that they fully understand
the true customer value of the new product.
Only with this understanding are they in a
position to develop an appropriate product
communication strategy.
Q: It seems this would make sense espe-
cially in B2B, because the value you are
trying to create with the product is prob-
ably more specialized and something that
you really have to understand.
A: I couldn’t agree more. And the take-
away for lots of people in innovation is:
communication is not a task to be given to
so-called specialists. Or you at least need
to check the communication they come up
with. What we very often see is that this
part of the process is handed over to other
functions, while the innovation people
think they are done and start with a new
project. They are not done. The product is
only ready when it is on the market and
successful, not before.
Q: Speaking of B2B, the book uses exam-
ples of both the B2B and B2C sector. How
do the approaches differ when applying
the bookʼs lessons?
A: The principles are 100% the same,
there is absolutely no difference. The ways
to apply them are of course slightly differ-
ent because if we take private customers in
the B2C area, the user and decision-maker
are the same person. But in the corporate
world, we have a buying center, we have
users, procurement people, influencers,
decision-makers and so forth. So the situ-
ation is a bit more complex. Itʼs also more
difficult to identify needs. You have to go
to and take into account all of these target
groups. So, while it is a different method
of investigating, the general process re-
mains the same. The key principle is also
the same: Go early and ask.
Q: How do you make sure you get this stuff
right and make a successful product?
A: What you have to realize is that most of
these failures are really homemade. No ex-
ternal factors can be blamed; success or
failure—it solely depends on us. That first
of all is good news. We have developed a
bulletproof nine-step process, which will
lead to innovation success, almost guaran-
teed. It includes all the mentioned ele-
ments such as a willingness-to-pay analy-
sis, price before product, communication,
etc. Equally as important as the process
itself is getting it into the organization and
making it stick. For many companies, this
is a difficult and challenging transforma-
tion process. Here leadership and top man-
agement come into the game. If the C-lev-
el executives do not drive that
transformation and put a clear focus on
monetization and pricing, this transforma-
tion will not come to life. In the end, mon-
etizing innovation is a C-level task.
 Winter 2016

Up Close and at a Distance

Bill Bishop, author of the Sinocism newsletter,
talks current affairs and China in the media
By John Christian

B
ill Bishop was once called “the China
hand’s China hand.” Co-founder
of the stock market news website
MarketWatch, where he worked until the
company’s 2004 sale to Dow Jones, Bishop
lived in Beijing from 2005-2015, a span
that included the Beijing Olympics, the
Global Financial Crisis, and the rise of Xi
Jinping. Long a commentator of China af-
fairs, Bishop started the Sinocism newslet-
ter 2010, which is read by journalists, poli-
cymakers, analysts and diplomats—more
than 27,000 people in total.
In this interview, Bishop talks about
how China’s relationship with the world
has changed during its ascendance to
second-largest economy in the world,
as well as some of the serious economic
challenges it faces today, including the
current backlash against globalization.
But along with that, he also discusses the
many bright spots, and the hazards of get-
ting caught up in what can be a biased and
negative news cycle mentality.
Q: You lived in China during a very event-
ful period. How did China’s relationship
with the world change along with the
various developments that you witnessed?
A: I think that China is far more integrat-
ed with and impactful on the world than
it was [in 2005]. China is a much more
powerful country now across pretty much

CKGSB Knowledge 2016

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Q&A

every dimension, and so its influence is Q: So what should we make of those mixed
felt much more profoundly globally, both messages?
good and bad. I think that along with that A: Well, the Chinese Communist Party
increase in power and the continuation of
China’s rise, that now versus ten or 11
China is far more is always good at contradictions. When
it comes to SOEs, it’s not just about hav-

years ago, China looks to a lot of coun-
tries like a bigger opportunity economi-
cally, but also a bigger challenge… from
a geopolitical perspective. And that’s not
just from a US perspective. All over the
Asian region, Europe, the US, there’s a
lot of good that has come with the rise of
China, but there’s also a lot of concern
and a lot of problems, too.
The other [big change] is that the
economy looked like it was potentially on
a pretty healthy trajectory in 2004, 2005.
Not great, but it had more potential. Now
when you look at China’s economy, it’s a
lot bigger, but it’s got a lot more problems
and a lot more debt and so it is a bit harder
to be as optimistic as people were back in
integrated with
ing them large, it’s actually about putting
the party back in command. The central
SOEs, all big decisions at the board level
and impactful on are supposed to be approved by the party
committee, and so it is reinserting the
Communist Party back into business and
the world than it society in a way that it had not been for a
long time… I think they see enough prob-
lems in society and in the economy that
was [in 2005]. their natural instinct is to go back toward
more control. And this is the main contra-
diction. They can keep going for a while
China is a much [this way], but they are not going to hit
their maximum. It is going to hinder hit-
ting the maximum potential for the Chi-
more powerful nese economy.
It’s also not a binary success or fail-

country now
ʼ04, ʼ05, and certainly harder to see the ure, it is more of an ‘okay, so it won’t be
low-hanging fruit that’s going to drive a as good as it could be.’ But at the same
lot of economic growth. And the Chinese time I think the party would argue that
themselves say this. This is a much more
difficult time for the economy and for re-
forms.
across pretty if they released control too much then it
will be chaotic. And so the solution is to
basically tighten the party and muddle

Q: In any given news cycle, there’s a raft
of negative or alarming stories about
China’s economy, from rising debt to the
aging population and many more. How
would you rank these problems in terms
of importance?
A: They are all massively complex and
much every through, which they have been doing for
quite some time.
dimension, and Q: What bright spots would you identify?
A: In the current media environment in
the West, you mention some bright spots
so its influence and you get shot down as like a reform op-
timist or naive. The internet economy is a

difficult problems. I think the thing that is
probably the most pressing at this point,
and certainly potentially the most con-
straining when it comes to near- and me-
dium-term policy, is the excessive growth
in debt and the mal-investment. If there
is something that ties it all together—and
this is something that is not controversial
in China, it is something the party says it-
self—is that reforms are not complete, and
that you’ve got this kind of semi market-
based economy with too much and lately
growing interference and control from the
party-state… I think when you look at the
mal-investment, that comes down to again
too much party-state interference in the
economy. The Third Plenum talked about
is felt much
more profoundly
globally
having the market being the deciding fac-
tor, but in fact it has seemed to have gone
the opposite direction since then because
the party-state is much more focused on
control right now. And I think that is ulti-
mately going to be… the biggest barrier,
or the most likely element that derails or
significantly hampers the reform efforts.
bright spot. It’s still relatively small, but it
is a remarkably vibrant, robust and quick-
ly-growing place. Just look at Alibaba’s
[growth] numbers. The consumer sector
is not growing as fast as people thought
it was going to be, but it is still growing,
and so there is still a lot of opportunity
in the consumer area, and certainly from
a perspective of investment in businesses.
Much of China is still relatively poor, and
so there are still lots of opportunities, and
the consumer sector is still backwards in
a lot of areas.
As difficult as the economy can be,
and as bad as the situation looks, and as
negative as the commentary is that you
get in Western media, there are still plen-

60 / CKGSB Knowledge 2016

 Winter 2016

ty of opportunities in the Chinese econo- China has been trying to build its own
my. Certainly if you go there and spend semiconductor industry to be able to ba-
time in the big cities like Beijing and sically indigenize the industry so they no
Shanghai, you don’t feel like the place is
in a depression or about to collapse. It’s
As difficult as the longer have to use foreign chips. We are
seeing this across the tech sector, across

the opposite.
Q: You have been back in the US, in
Washington DC, for about a year now.
Has the distance given you a different
perspective?
A: You know, it is difficult to avoid the
DC groupthink and getting in the DC
fishbowl. But the flip side is, through the
Sinocism newsletter, regularly having lots
of interesting conversations [with people
about China].
One thing that I think is important for
American businesses is that I think there
are some [business leaders] that have not
quite grasped how much the attitudes
in DC have changed... I think you are a
economy can
the Chinese IT stack … They have actu-
ally said they want to replace Western
firms. Part of it is just listening to what
be, and as bad the Communist Party says. Under Xi, of
course, the party is much more robust…
If you are a responsible politician and you
as the situation couple that with what is going on in your
own country, conversations around dis-
satisfaction with globalization, the prob-
looks, and as lems that foreign companies are facing in
China anyway, it’s really hard to make the
case that we should continue business as
negative as the usual. It certainly feels like the Chinese
are getting a much better deal than the rest
of us.
commentary Q: But do you think the reaction thus far

is that you get

going to see a much harder approach to
China, and a greater willingness to tol-
erate friction and conflict. I don’t mean
military, kinetic conflicts, but just much
more willingness to push hard on China
to protect American interests, something
that Obama has not [done] in some areas.
From that perspective, it has given me a
better insight into how the US is going to
deal with China. I think there’s a desire
in Europe and other parts of Asia for the
US to take a tougher stance toward China.
And if the US does it, other countries may
follow.
has been the correct one? Was Brexit the
right way to react?
A: No! But I think that, for example, it
in Western would be great if the US-China bilater-
al investment treaty would pass. I think
it’s a long way away, longer than people
media, there think. The problem is that trade is very
important, but it does have to be within
rules, and China can’t have its own set
are still plenty of rules and then play by the rest of the
world’s rules. There is some dissatisfac-
tion with parts of their compliance with
of opportunities the WTO.
You asked earlier about what are the

Q: The recent past has seen a marked
move away from globalization, at least
in rhetoric, with countries talking about
trade barriers and so on. Why is that hap-
pening now?
A: I think it ties into the broader question-
ing of whether or not globalization and
trade have worked for everybody. And this
is why you see Brexit, why you see vari-
ous populist movements in Europe, and
why you see Trump. There have been a lot
of losers to globalization, and one of the
key components of globalization has been
the rise of China and trade with China.
But I think that the benefits have accrued
to a smaller number of people than were
in the Chinese
economy
told were going to be getting the benefits.
And then you look at the way that China,
when it comes to free trade, [restricts in-
vestment]. People ask, if we can’t go buy a
media company or a chip company in Chi-
na, why can China buy a media company
in the US, or a chip company in Germany?
You are going to see a lot more discus-
sions around reciprocity.
You also have sectors, for example
semiconductors, where for a long time
good spots. When you look at the service
sector, and you look at things like media
and the internet, those are basically closed
to foreign investment, and those are some
of the most exciting parts of the Chinese
economy. And so something needs to
change. If those sectors are blocked to
foreign companies, then the Chinese com-
panies should have some limitations on
what they can do outside of China. Other-
wise it is fundamentally unfair, and it is
not like China is some two-bit little coun-
try where it doesn’t matter. They are in-
credibly smart, incredibly wealthy, in-
credibly large and have much more ability
to have impact than pretty much any other
country in the world.

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The Thinker Interview
Talent Management
Edward E. Lawler III, Distinguished Professor at the Marshall School
of Business, talks about how the nature of employment has changed
B
usiness has changed, specifically the
relationship between management
and employees. Once upon a time,
companies offered careers—long-term,
stable employment wherein the employee
filled a narrowly-defined role. In past gen-
erations, it was common to spend an entire
working lifetime at a single company.
But with globalization and the ratchet-
ing-up of competition, employers have both
the ability and the need to be more nimble.
Edward E. Lawler III, Distinguished Pro-
fessor of Business at the University of
Southern California, Marshall School of
Business, expounds on the new model,
which he terms “talent management.” This
new paradigm focuses on the critical needs
of a business, and finding the right people
that can fulfill them. It is a model that is
62 / CKGSB Knowledge 2016
By John Christian
highly flexible, and also much more open
about the needs of the company and how
employees fit in with them.
Q: You’ve published over 50 books on
organizational strategy, management, hu-
man resources and other topics in almost
as many years. How have corporate chal-
lenges in these areas changed over time?
A: They have changed in many, many
ways. I think the global economy has made
an enormous difference in how people think
about designing organizations. Technology
has changed dramatically, particularly the
information technology piece of it, and that
has had a big impact on how you can man-
age and how you can treat people. Those
changes in many ways have made my area
of interest much more important, that is
human capital, because in today’s environ-
ment access to the right human capital, the
right talent, has become a very important
source of competitive advantage for orga-
nizations. The global supply of talent has
made a big difference in where people do
work, what kind of work is done, and how
people work.
The options that organizations have
with respect to where they do work is a
good example, and we see it playing out
both politically and economically depend-
ing on where the talent is located at the
right price. Organizations can now much
more easily move work to the place where
they can get the best value for their dol-
lar, in ways that simply were not possible
20, 30 years ago. That is partly technol-
ogy and partly just political openness to

work being moved around the globe. Yes,
there are a lot of restrictions and limita-
tions on trade and the movement of work,
but compared to the past it is much more
possible to produce major products like
computers, autos, and software from work
places around the globe, that don’t neces-
sarily match where you are going to sell
the product.
Q: What are some of the key challenges to
managing talent? And are corporations do-
ing a good job on average?
A: It does depend somewhat on where you
are in the world. For the last 20 years I’ve
been doing a survey of large corporations
in terms of their HR practices and the last
couple of rounds have included data from
China (Lawler, E., and Boudreau, J., Global
Trends in Human Resource Management,
Stanford Press, 2015). It is notable that the
Chinese companies tend to be much more
traditional in their HR policy, practices,
and the way they staff and manage HR.
They take a more traditional bureaucratic
job-focused approach, one that has been
around for centuries. Whereas if you look
at European and US companies, they are
moving toward what I call a human capi-
tal orientation. They have changed polices
around job security, stability of employ-
ment, and are much more focused on tal-
ent development and work relationships
that are more transactional, and often don’t
involve the career element that they used
to involve 10, 15 years ago. We are see-
ing in companies a new talent management
model slowly but surely developing. It
combines short-term type employment for
some people and relatively brief periods of
employment (three to five years) for a sig-
nificant part of the workforce, to give orga-
nizations a kind of agility that they haven’t
had traditionally.
And of course there are more rewards
for performance in the West as another
factor. We also have seen the decline of
unions, which provided a number of restric-
tions on organizations. In the United States
they have become a less and less important
factor. One exception to that is public ser-
vice, government employment, which still
has strong unions.
Q: Can you explain more the differences
between the old approach and the human
capital approach?
A: A number of features are different. The
old model focused on having a job whose
characteristics did not typically change
and looking for somebody to fit that job.
The human capital model focuses more on
the talent that individuals have. It is much
more “what is our strategy, what are our
difference-making skills, where can we find
people with those skills and how much do
we need to pay them so that we can be the
employer of choice for them.” So in some
ways it is more of a competency-based, or
skill-based way of thinking about talent,
versus a job-based approach where we have
a task and we need somebody to perform it.
Q: Did the change in models happen be-
cause the nature of worked changed?
A: Certainly the nature of work has
changed. As I said, it has become more mo-
bile and diverse in terms of what situations
you can do work in. Increasingly the sim-
pler work is done by machines and com-
puters. What we are left with is stuff that is
more difficult to do, and you can’t often do
that with an organization that doesn’t have
a focus on getting the right talent, develop-
ing the right talent and rewarding the right
talent for their performance. You certainly
still, of course, have fairly low-skilled la-
bor in various parts of the world and that’s
all going on, but on top of that, or separate
from that, is this evolving infrastructure of
companies that are moving toward talent
doing more complex things and doing the
simpler things with technology.
Q: So we are thinking, for example, about
the difference between people who assem-
ble cars versus the people that design them,
right?
A: Actually, the auto industry is one that I
spent a lot time working on years ago when
I was at University of Michigan. At the
time there were many repetitive, 50-second
cycle jobs on the assembly line, and a little
bit of robotics. You go there today and you
will see far fewer people and many of them
will be monitoring and setting up automat-
ed processes and not actually touching the
Winter 2016
product—that’s being done by machines.
And a lot of the scheduling and speed of
the assembly line is determined by comput-
ers. That is what dominates the auto indus-
try today, and as a result not as many jobs
are leaving the US as there used to be, be-
cause you need skilled people to do them.
So it makes a lot less sense to outsource or
move offshore from the United States at
least many of the jobs that are left in the
factories. They are skilled jobs, whereas the
jobs that used to receive high pay weren’t
skilled and could be done elsewhere by less
well-trained much cheaper labor or by ma-
chines.
Q: You have singled out Google as a com-
pany that has done a terrific job at talent
management. But not every company is a
Google. How can an average company do
it?
A: You’re correct in saying Google is an
outlier. Very few companies can afford to
have 40 or so PhDs using smart data to de-
cide how much to pay people and who to
hire, and measuring the performance of in-
dividuals on an ongoing continuous basis,
and providing all sorts of perks and extra
benefits to make sure they can attract and
keep the best and the brightest. They are
an exception. You also get into a cause and
effect issue: maybe they can provide these
benefits because they have done really well
financially.
What most organizations can do is fo-
cus more on how talent is managed relative
to their business strategy, and make smart
decisions about how talent can provide
them, with a competitive advantage. Most
organizations have at least a set of tasks
that need to be performed at an above-
competitor level. If they can identify those
and figure out what talent that they need
to get a competitive advantage, that will
be a difference maker. They can look for
people they can attract with particularly
good packages, become more individual-
ized or differentiated, segmented as some
people call it, in terms of how they treat
their talent and really focus on the talent
that makes a difference.
This is in contrast to the bureaucratic
model, which treats everybody the same is
CKGSB Knowledge 2016
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The Thinker Interview
the least disruptive and is the easiest to ex-
plain and justify. It is also the best way to
avoid unions because they aren’t going to
get complaints about unfairness or prefer-
ences.
The newer models say, what we need to
do is think about how we can get a com-
petitive advantage, and we have to be open
about that and up front with that. I have ar-
gued for public pay and more open informa-
tion about what is going on, which is still re-
sisted in most of the Western world, so you
can show people what the strategy is, how
you are implementing talent management
practices as a portion of the strategy, and
you can justify it on that basis. This is bet-
ter than saying we treat everybody equally
here, and maybe we do a little more for
the better performers, but we can’t tell you
what we do, at least in terms of dollars, and
of course we reward seniority and so forth.
Q: You’ve recently written against too
many benefits, for instance free workplace
childcare or unlimited vacations. Office
ping pong tables also come to mind. What
is the smart way to use extra benefits?
A: I’m a bit ambivalent about some of those
extras, in the sense that it may be that they
make a significant enough buzz impact that
they improve a company’s brand as an em-
ployer to the point where they do pay off
for the company. Looking at this issue goes
back to research that I did in the 1970s when
in the US people began introducing what is
called cafeteria benefit plans that gave peo-
ple choices that included cash. It turned out
that many benefits are valued less than their
cost. When all is said and done, if you ask
people if they want cash equal to the cost
of the benefit, or the benefit, by and large
people want the cash.
What we did then, and a number of
companies have built it into their systems
now, is suggest more choice for people so
they can pick a benefit package that fits
their values. Where I work I have multiple
different insurance plans that I can choose
from, which makes sense because people
here have very different lifestyles, very dif-
ferent risk tolerances and of course at very
different ages you have very different pref-
erences.
64 / CKGSB Knowledge 2016
What most
organizations can
do is focus more
on how talent is
managed relative
to their business
strategy
So my concern about the Silicon Valley
thing, at least from a return on investment
point of view, is that some of the things
that they are giving out, free meals, or dry
cleaning services is that they may not be
well valued relative to their cost. But that
may also create buzz and make you a mag-
net employer. I think Google now says that
they get two million job applicants a year.
That improves their selection ratio to a level
that is mind boggling, in fact it is probably
a negative because they have to process all
those applications.
Q: What do companies need to be looking
at right now to be more agile and adaptable
today?
A: Obviously a whole bunch of things. I
think a fundamental point, at least on the
talent side, is what is your contract with
your employees? What is your basic propo-
sition around how long can they expect to
be employed, what they have to do to con-
tinue to be employed, what you are going
to do and what they need to do to make a
successful employment relationship.
One extreme is a company I have writ-
ten about with my coauthor Christopher
Worley (Built to Change, Jossey-Bass,
2006), Netflix. The thing I like about them
is that they are very, very clear. Basically
they put the responsibility for development
on the employee. What they say to people
is: Look, you have a job here, a very well-
paid job, as long as your skills match what
we need. Then the question becomes who
is responsible for seeing individual skills
meet what the company needs. And they
say, we take some responsibility, we’ll try
to give you information about what is hap-
pening, what skills we need, but we can’t
guarantee that we are going to be right, or
that your skills will match what we need in
the future. So be prepared to not be an em-
ployee here. Ironically, their HR VP who
lectured us on the advantages of this system
lost her job because the organization decid-
ed she was no longer what they needed in
the HR function.
I say all that because Netflix has suc-
cessfully made several transitions in the
way they do business in a relatively short
time. There aren’t very many companies
like that around. Most aren’t agile enough
to make a major change—Kodak, Xerox.
Q: But is there some part of that very open
statement that is hostile?
A: Oh definitely, it doesn’t attract every-
body! But they say: That’s good. We don’t
want to employ everybody. We need the
agility and the flexibility that we get from
that kind of employment relationship. But
while you are here we will treat you really
well. We’ll tell you where we are going,
we will pay you above market wages, we’ll
treat you well and we will have a good re-
lationship. I’m not big on the existence and
importance of age differences, but I think
this does go over better with many younger
employees, people that have grown up in a
generation where they may not want a ca-
reer with a company and so on.
When I was graduating: I interviewed
with AT&T and they said, we are not offer-
ing you a job, we are offering you a career.
And if you don’t perform at a high level,
you won’t keep going up the management
hierarchy, but you will still have a job. The
ultimate of course is to keep going up the
hierarchy. But if you don’t prove to be that
kind of person, that’s okay you will still
have a job.
Q&A
Larry Summers on China’s
Development
Larry Summers assesses Chinese economic challenges and reflects on
the worldly lessons of China’s success
C
hina is facing one of the toughest
economic restructurings in world his-
tory: changing the growth model of
a colossal economy against the backdrop
of ebbing domestic growth, environmental
degradation, and financial disequilibrium.
But in the global political economy, the
world looks at China gaining weight in the
existing economic order and pushing for
greater influence.
Larry Summers, now President Emeri-
tus at Harvard University, has advised
the United States on economic affairs for
By Maurits Elen
many decades in various roles, meeting
numerous times with the Chinese leader-
ship to help deepen Sino-US relations. In
this interview, the former Treasury Secre-
tary in the Obama administration discuss-
es various Chinese domestic challenges,
as well as China’s relationship with the
rest of the world.
Q. In the past few decades, millions of
people have been pulled out of poverty in
China but the country still faces, along
with the US, one of highest levels of income
Winter 2016
inequality. How can China make growth
more inclusive?
A. In driving prosperity, markets work
much better than planned-economies. After
all, letting market forces operate so individ-
ual initiative can flourish and so individuals
are rewarded for taking initiative can pro-
duce staggering opportunities and returns.
The other side of markets, however, is
that rewards can be very unequally distrib-
uted. It is the role of policy to try and make
sure that everybody has an opportunity to
share in economic growth. There are many
CKGSB Knowledge 2016
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Q&A
dimensions of that, there is giving every-
body a chance to compete in the market-
place, that’s why education is so central and
it must be made sure everybody can get as
good an education as possible, regardless of
family background. Taxes must be collect-
ed in a fair manner and in which those who
are positioned to pay more are expected to
pay more. It is important that prosperity be
based on giving people what they want,
producing new products, and producing
old products in more efficient and effective
ways, rather than working the system to get
monopoly power.
China needs to work on all of these ele-
ments. Making sure that opportunities for
children are the same, regardless of where
in China and to whom in China they are
born. Making sure that the success of enter-
prises depends on the quality of what they
sell, not on the depth of their relation with
officials in government. Making sure that
taxes are collected in a fair way, and mak-
ing sure that those who lead enterprises and
communities do so for the benefit of their
stakeholders, rather their own. I think these
are all core elements of inclusive prosper-
ity that China should take into account as it
moves forward.
Q. China needs to attract more private in-
vestment. What can the government do to
stimulate private investment in an environ-
ment with a relatively low returns on as-
sets?
A. For enterprises to be able to succeed it is
key to have a relatively predictable business
environment. In a situation where the rules
for private enterprises are very unclear, it is
going to be seen as very risky to make in-
vestments in private enterprises and that is
likely to discourage the level of investment.
So it comes back to a predictable path for
policy and certainly for a non-punitive ap-
proach to businesses that are succeeding. It
also goes to creating a freer environment in
areas relating to in particular the provision
of consumer services in China.
Q. Real estate is a driver of Chinese growth,
but recently has looked bubbly—asset
prices in some cities have risen more than
30% this year alone. What are your views
66 / CKGSB Knowledge 2016
on how Chinese policymakers are dealing
with this situation?
A. I think they are pursuing the right kinds
of approaches. They are looking hard at
various kinds of controls on down-pay-
ments and the like. Moreover, they are
implementing restrictions on leverage, both
for purchasers of homes and for developers.
International experience suggests that
when you have residential real estate bub-
bles it is hard to know, because sometimes
real estate bubbles can rise very substantial-
ly and keep rising. This makes it very hard
to gauge the timing. I think it is a somewhat
problematic type of question. But surely the
inflated asset prices are a sign of distress
and a sign of potential problems to come,
and so it is appropriate for the Chinese au-
thorities to respond to that.
Q. What is your broad view on the future
of China and the world in terms of growth?
A. I would be surprised if either China or
the world economy grew as rapidly in the
coming 15 years as they have grown in the
last 15 years. Some of that is demographic,
some of that is technological, and some of
that is political. I think that it is reasonable
to aspire to continue significant progress,
although I doubt it will be as rapid as it has
been historically in the non-crisis years.
Q. Given the slowing growth and other eco-
nomic challenges facing China today, some
Chinese officials have expressed concern
about the economy falling into the middle-
income trap. What are your views?
A. I never been really a huge believer in
the middle-income trap as a concept. I am
not sure that it is really true that there a cer-
tain levels of development at which growth
slows. What is true is that as you get richer,
the easiest opportunities for convergence
have already been captured. This makes
things harder, especially now China has
both challenges in maintaining stability in
the near term and challenges with respect
to the achievement of longer-term growth
at rapid rates. Nonetheless, I do not see any
reason why China should not aspire to be
a significantly larger fraction of the global
economy in 2030 than it is today. Certainly
China cannot assume rapid growth in the
future because it has achieved so in the
past. Still, I do think this is a reasonable as-
piration for China.
Q. You have written that international
economic arrangements need to be adjust-
ed to reflect the reality of a more powerful
China—in what ways?
A. China needs to be given more of a voice
and have more to say in a range of interna-
tional fora, in particular the international fi-
nancial institutions. There needs to be more
willingness to learn the lessons of China’s
tremendous economic success, but also the
canon of traditional Western economics,
as Western institutions provide technical
assistance to developing countries. I think
there needs to be more serious conversa-
tions with China about what the nature of
the global system ought to be looking like
in a go-forward basis, rather than simply
conversing in ways that are focused on
Western visions and trying to have China to
become involved in those Western visions.
In general, it needs to be a process of mu-
tual respect in the formulation of interna-
tional economic policies.
Q. Could you expand on what the lessons of
China’s economic success are?
A. It is more for China to draw the lessons
from its experience than it is for me. China
has certainly demonstrated a power in cer-
tain circumstances of a gradual liberaliza-
tion strategy, they have demonstrated the
power of an urbanization strategy, and they
have demonstrated that a basic governmen-
tal responsibility for education and health-
care can have very substantial benefits.
They have also operated in a model that
has had more reliance on administrative
controls and direction, and less pure reli-
ance on prices, especially in earlier stages
of economic development, than would be
the traditional advice of the international
institutions. In just what ways those lessons
do or do not carry over is subject to ripe
debate, but in light of the fact that China has
for several decades achieved more rapid
growth than anyone else has, over a very
long time period, one has to regard that as
an impressive achievement, from which the
world should be prepared to learn.
Downtime Winter 2016

Working it Out
Chinese businesspeople are
finding new ways to be fit
By Ida Knox

Image by Lisa Ye

CKGSB Knowledge 2016

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Downtime

D
oing business in China can be a
fraught affair. Overly lavish ban-
quets and too much baijiu have long
been a part of the process, and combined
with the high-stress culture of today’s Chi-
na, business executives and workers alike
can be easily led down the path to ill-health.
A study published last year in BioMed
Research International found that cases
of gout—also known as the ‘disease of
kings’ due to its association with a rich
diet—are generally high in China, but tell-
ingly concentrated in the south, where the
economic boom is concentrated. Jiang
Zuiyi, a 55-year-old government official in
Shenzhen, told The Diplomat in April that
he developed the painful condition around
the time he moved to Shenzhen from the
countryside. In his view, business banquets
were among the culprits, along with lack of
sleep.
But the good news is that a new genera-
tion of Chinese work warriors are rebelling
against the over-indulged status quo.
“Your bosses always ask you to drink
a lot to show your attitude towards the
company,” says Zhang Lan, who works in The 2016 Shanghai Marathon attracted tens of thousands of young professionals
real estate in Shanghai. “I don’t like [this]
drinking culture.” Fitness Fashion world. Running in particular has become
And just as these bad habits are coming The traditional Chinese approach to fitness hugely popular.
into question, new approaches to health and is slow and steady, as evidenced in the ap- “Running is often seen as a means to
wellness are coming into vogue—particu- parently languid movements of tai chi. El- balance the lifestyles of office workers,”
larly among the young, hip and urban. Ris- derly practitioners of these ancient arts can says Noora Ronkainen, a postdoctoral re-
ing with this trend is a multibillion-dollar still be seen everywhere in Chinese cities, searcher at Jiao Tong University’s Exer-
fitness and food industry. Fitness apps are particularly in the morning. cise, Health and Technology Center. “The
being downloaded by the tens of millions, But younger people do not seem so in- more-modern companies seem to have in-
and gyms are popping up almost every- terested in continuing that particular tradi- creasing support for this in the form of run-
where you look in major cities. According tion which may have to do with the newly ning groups.”
to Ibis World market research, the gym, frenetic pace of life in 21st century China. China, she says, is morphing from a
health and fitness clubs industry in China is “Young people live and work under culture where peaceful walking in the park
set to generate “$5.81 billion in 2016, with increasing amounts of stress,” says Guo ruled supreme to a place where marathons
annualized growth of 11.8% from 2011 to Yaxuan, a Jilin-based fitness instructor. and “10k’s” (10-km running competitions)
2016.” And that does not include sales of “Those born in the 1990s have less job are taking over, and it is not happening qui-
health food, which seems to be a craze all stability, many of them are not getting etly, despite the relatively solo nature of the
its own. married.” sport.
At its heart, all this represents a funda- He says that this crop of stressed-out “Running seems very social and even
mental generational change in attitude, one workers are drawn to gyms, especially as though many do some running alone they
linked to the emergence of broad prosper- they work their way up the ladder. With make sure it is known in their social media
ity. China’s 385 million millennials now edg- groups,” Ronkainen says.
“Growth [in this industry] will con- ing towards 30, gym memberships, ex- This social media connection is key,
tinue for sure, because of the middle class ercise classes, jogging, sports teams, and due to the fact it is largely millennials who
and millennials,” says Thibaud Andre, a marathons—all very Western sports con- are joining the running craze.
research associate with Daxue Consulting. cepts—have taken off in the Chinese fitness “On Weibo, ‘#fitness’ is huge in China,

68 / CKGSB Knowledge 2016


over 100,000 people have used it,” says
Andre. “It’s trendy to post a picture while
in the gym.”
That gym trendiness has also caused the
options to multiply to the point where there
seems to be something in the gym line for
almost everybody.
“Anyone can choose from yoga, Cross-
fit, HIIT classes, etc,” says Vidal Narvious,
who owns a Golden Gloves Gym in Shang-
hai.
For Narvious, the need for stress re-
lief and the need to socialize go hand-in-
(boxing)-glove.
“There really isn’t a better feeling than
hitting a pad or heavy bag when you are
stressed,” he says. “And as a side effect,
you are meeting new people.”
Gym and Juice
The newfound popularity of modern fitness
in China has brought with it a multibillion-
dollar opportunity.
According to a Xinhua news report,
“the total number of gym attendees across
70 major Chinese cities has increased by
four to five million each year since 2011.”
Prices of memberships at these gyms
range from RMB 2,000 to 15,000 a year in
Shanghai. It is a hefty price in a city where
the average monthly salary is around RMB
6,000, but then again it is not average peo-
ple buying them—customers are compara-
tively wealthy and members of the growing
middle class.
The buying power of this group has
attracted a huge amount of private invest-
ment, and given the social media aspect
pointed out by Andre, a lot of it is going
into apps and tech.
“Apps can provide a full line of ser-
vices, from individual coaching of perfor-
mance to incentives,” says Andre.
Venture capital firms GGV Capital
and Morningside Ventures are leading a
$32 million Series C funding round in the
Chinese fitness tracking app Keep, which
has 30 million users. Codoon, a close com-
petitor that tracks movement and sleep, has
more than $91 million in funding.
The government has also expressed the
desire to get in on the action. Liu Qing, the
deputy secretary-general of the Chinese
Association of Sports Industry, told Xinhua
News Agency that the fitness industry will
become a “pillar in the national economy”
when China’s GDP per capita reaches
$8,000—and according to the World Bank,
it was $7,924 in 2015.
“The government wants to put money
into fitness and sports in general,” says An-
dre. “Investment [by] the government in fit-
ness will focus on all levels.”
Data from Daxue Consulting puts the
current annual output value of China’s fit-
ness and leisure industry at about $150-200
billion, accounting for about 0.15%-0.20%
of domestic GDP, and growth in the sector
shows no sign of slowing.
The opportunities also extend to food
and beverage. Sales of ‘health food’ in Chi-
na are around RMB 200 billion annually,
according to the China Health Care Associ-
ation. Forbes and Mintel, meanwhile, have
reported that “nearly nine in ten Chinese
consumers now drink plant-based concoc-
tions, be it soybean drinks, juices or grain
drinks.”
Winter 2016
Diet and health supplements are also
seeing a hike in popularity. Data from mar-
ket research firm Euromonitor International
notes that in 2013, sales of protein powder
reached nearly RMB 392 million, up from
RMB 275 million in 2012.
But healthy lifestyles might negatively
impact one particular beverage indus-
try: baijiu, the grain-based alcohol drunk
across China that has a kick like a mule.
The World Alcoholic Beverage Alliance’s
2016 Development Report of the Global
Alcohol Industry notes that sales revenues
slipped 3% from RMB 528 billion to RMB
512 billion.
Not all alcohol is treated equally in the
health industry, however. Red wine is often
considered to have health benefits, and Chi-
nese consumers drank 1.86 billion bottles
of it in 2013, becoming the world’s biggest
market for the beverage.
Leading From the Top
But does the burgeoning growth of the
health industry mean that China’s stressed-
out office workers are having an easier time
of it? Not necessarily.
“According to some market surveys, it
stops at a desire to work out,” says Yaxuan,
the fitness instructor. “People often tend
to come up with excuses, or would rather
grab a drink and hang out with friends after
work.”
But ironically, Chinese companies that
push their employees to drink and banquet
are now also beginning to push them to be
healthy. Zhang Lan, who complained about
work-related boozing, has found that fitness
may be taking a seat alongside the usual
feasting.
“[We do] hiking or some team building
activities at least once a year,” says Zhang.
This fall, her entire company went to
hike around a lake in Zhejiang province not
far from Shanghai. At first she was decided-
ly unexcited about the prospect of spending
the weekend with her co-workers, especial-
ly because it is was compulsory in addition
to being unpaid. In the end, however, she
says she had a pretty good time, and she’s
unequivocal about which she prefers.
“Definitely the hiking,” she says with a
laugh. “At least it’s good for the health!”
CKGSB Knowledge 2016
/ 69
 Bookshelf

Color and Context

Kaiser Kuo recommends a range of books on China

M
y job is running a podcast about
current affairs in China, the Sinica
Podcast powered by SupChina,
and so I actually have a lot of homework
reading to do. Many of the people we in-
terview for the podcast are authors, so that
makes up a good portion of my China-
related reading.
For people that are new to
contemporary China as a topic, there are a
few introductions that I recommend. One
that doesn’t get nearly enough play is by
Damien Ma and William Adams, called
In Line Behind a Billion People—it is a
readable, sensible introduction to China,
centered around scarcity in what is the
world’s most populous country. Another
Kaiser Kuo is the founder and host of the
one I would highly recommend is Arthur
Sinica Podcast, and former Director of
Kroeber’s new book, China’s Economy:
International Communications at Baidu
What Everyone Needs to Know. It’s a very
accessible, very smart book about the most
important economy in the world outside the United States, and
how it came to be what it is today. Other books I recommend
are Wealth and Power, by Orville Schell and John Delury, Evan
Osnos’s Age of Ambition, as well as Peter Hessler’s body of work.
Along with these, there are a few books that, while perhaps not
so palatable, were nevertheless very important to me. The work
that most informed how I look at things is the trilogy by Joseph
Levenson, Confucian China and Its Modern Fate, which was
written in the 1960s and tracks the decline of Confucian traditions
in the 19th and early 20th centuries. It is incredibly dense, and I
read it when I was a graduate student when I could untangle the
prose. Another formative book for me is China in Disintegration,
by James Sheridan, about the May 4th period and the absence of
political culture at the time.
The next two books I’ll recommend
are The Origins of Political Order, and
Political Order and Political Decay, both
by Francis Fukuyama. These books are not
directly about China, but they are essential
for any Westerner trying to put China in a
broader context. I think it is a bit ironic that
everyone still associates Fukuyama with
the book he wrote in the early 1990s, The
End of History and the Last Man, which is
kind of the epitome of this teleological, built
history that is all converging on the victory
of democratic capitalism. But these two
books are, if anything, total antidotes to that
whole end-of-history business. What it really
does is to situate development of institutions
of constraint, like rule of law, separation
of powers and the like, in a very specific
historical context and looks at the emergence
of these institutions in different civilizations.
We really need to understand why it didn’t happen in most of the
world, and how incredibly contingent it was that these things did
congeal in Western Europe and its colonial offshoots. So for me,
even though it is not really a book about China, it spends an awful
lot of time with China, and I suspect Fukuyama’s real mission in
doing this was to explain why China is where it is today.
Finally, I do an awful lot of reading outside the topic of China.
At the moment I’m in love with The Nix, a first novel by a writer
named Nathan Hill. It’s very much in the tradition of Michael
Chabon or Jonathan Franzen, a gigantic sprawling multi-
generational tale that’s trenchantly observed, and witty and funny.
It’s also just heartbreaking and the prose is just gorgeous. Worth
anyone’s time.

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70 / CKGSB Knowledge 2016

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